Estate Planning Guide

123 APPENDIX Interest in Possession (IIP): when a beneficiary has “a present right of present enjoyment in the net income of the Trust property without any further decision of the trustees being required”. Inter vivos: between living persons – referring to a transfer or gift made during the donor’s lifetime, as opposed to in their Will after their death. Lasting Power of Attorney (LPA) (Property and Affairs): a document, separate from a Will, which allows a person to appoint people to manage their financial affairs (called Attorneys) while they are still alive but unable to manage. Letter of Wishes: guidance about your wishes, which your trustees do not have to follow. Life Assurance: assurance is something which is ’assured’ (or guaranteed) to happen. A life assurance policy therefore pays out ’when’ you die, rather than ’if’ you die. Life Insurance: insurance is based on something which might happen. A life insurance policy is for a fixed time period and will pay out should you pass away within that time frame. If you haven’t passed away within that time frame, the policy comes to an end and you are no longer covered. This type of policy is therefore ideal for covering a mortgage or a loan, which last for a set period of time. Life Interest Trust: where a beneficiary is given an interest in trust assets for their lifetime, usually the entitlement to receive income, and/or live in a property owned by the trust. Life Tenant: the beneficiary entitled to receive lifetime benefits from a Trust. Loan Trust: an arrangement that allows the client to access the original loaned capital, either as lump sums or as regular repayments, while any growth on the capital is outside the estate. LPA (Health & Welfare): It is also possible to have an LPA (Health & Welfare) document drafted, whereby Attorneys are appointed to help manage health and welfare issues when the customer is unable to manage. Money’s Worth: something which is of direct monetary value to a person, or capable of being converted into money or something of direct monetary value to the person. Outright Gift: one in which you do not retain any benefit. In other words, you give away full ownership of the gift so that it is no longer part of your estate. Pension Commencement Lump Sum: the lump sum of money an individual can withdraw from their pension pot when they retire. Periodic Charge: every ten years the value of the trust, less the available NRB and previous CLTs, will be assessed for tax at a maximum rate of 6%. Potentially Exempt Transfer: when a gift is made during the donor’s lifetime that does not fall into any of the categories of gift that qualifies for immediate IHT exemption, until seven years have passed, it is known as a Potentially Exempt Transfer (PET). Probate Trust: a trust used to speed up the payment of proceeds on death by avoiding the need for probate in respect of the trustee owned assets. (Not an IHT effective trust.) Relevant Property: settled property (in trust) in which no interest in possession exists, but does not include ‘excluded property’. Scheme Pension: traditionally occupational final salary schemes based on length of service and salary, now more likely to have income limits set by the scheme actuary. Secured Pension: generally, purchasing an annuity or a ‘scheme pension’ using the capital of a pension fund will achieve a ‘secured’ pension which will not be subject to IHT. Trust: an arrangement where property is owned by trustees for someone else’s benefit. Unauthorised payment: a payment by a registered pension scheme that is not permitted by rules contained in the Finance Act 2004 (FA 2004). For example, payment of a scheme pension before normal minimum pension age would be an unauthorised payment unless the member is in ill-health, as would a lump sum that does not qualify as one of the permitted types of lump sum referred to in the FA 2004. There is an automatic tax charge on unauthorised payments, known as the unauthorised payments charge, and in some circumstances an additional surcharge. Uncrystallised: a pension fund from which no benefits have yet been extracted in any form. Will Trust or Immediate Post Death Interest (IPDI) Trust: a clause written into the Will that acts like a safety deposit box or safe. When the person dies certain assets are passed into the Trust by the executors. Summary of the Main IHT rules and allowances that currently apply IHT is levied on the assets (less deductible liabilities) of deceased persons either: transferred on death; gifts made within seven years of death or made at any time, when there is a reservation of benefit which continues within seven years of death: such transfers become chargeable at the time of death; gifts by individuals to discretionary trusts or other relevant property trusts, or to companies: such transfers are chargeable at the time the gift is made. For property in discretionary trusts and other relevant property trusts, there is a charge on the tenth anniversary of the creation of the trust and every subsequent tenth anniversary. Property leaving such trusts is also subject to an IHT exit charge. Assets are valued at the price that they might reasonably be expected to fetch if sold in the open market at the time of the transfer. In the case of a transfer by gift, the value is the amount by which the gift reduces the transferor’s estate. If in their lifetime the transferor bears the tax due on the transfer, the loss to the estate will include the tax. The NRB threshold is currently set at £325,000, frozen at that level until the end of 2020/21. Any unused NRB from a late spouse or civil partner can be transferred for the use of the surviving spouse or civil partner when they die. This is known as the “Transferable Nil Rate Band” (TNRB). This means that the second partner’s effective NRB can potentially be as much as twice the standard threshold, depending on the circumstances, therefore up to £650,000. From April 2017, an additional NRB is available when a residence is passed on death to direct descendants, known as the “Residence Nil Rate Band” (RNRB). This is currently £100,000. As with the main NRB, it is also transferable between spouses. This gives a total maximum effective NRB currently available to the second spouse to die, with a residence inherited by direct descendants, of £850,000. The amount of IHT payable on a transfer depends on the cumulative total of transfers (other than exempt transfers) over the previous seven years. This applies to transfers made on death as well as to lifetime transfers which are immediately chargeable or which become chargeable on death. No tax is payable on the part of the cumulative total below the NRB. Currently tax is charged at a single rate of 40% on the amount above the NRB for transfers on death and within seven years before death, and at half this rate for transfers which are immediately chargeable during lifetime. All taxpaying estates which leave at least 10% of their net value after deductions for the NRB (including any NRB or RNRB), liabilities, reliefs and non-charity exemptions to a qualifying charity, qualify for a reduced IHT rate of 36%. The charity must be subject to the jurisdiction of the UK or EU courts for the bequest to qualify for the discount. The tax on land and buildings, a controlling holding of quoted shares, unlisted shares and securities, and businesses may be paid by instalments over 10 years. However, if the asset is sold then the tax outstanding becomes immediately payable. Not all transfers are subject to IHT. The main exemptions include transfers between spouses and civil partners (subject to some limitation if the transferee is domiciled abroad); transfers to charities; an annual exemption for lifetime gifts not exceeding £250 to each recipient and for the first £3,000 of lifetime gifts (an annual