Estate Planning Guide

Gifts and Capital Gains Tax The gifting of an asset to another person or a company or trust, is treated as if the donor sold the asset at its market value. Capital gains tax will be charged on any increase in the value of the asset since the donor acquired it. But, some assets are exempt from capital gains tax, including gifts of cash sterling, cars, personal tangible assets worth £6,000 or less, and UK Government stocks and savings certificates. Lifetime Gifts Taper Relief 31 ESTATE PLANNING OPTIONS 30 ESTATE PLANNING OPTIONS CLAIRE TROTT ASSOCIATION OF MEMBER-DIRECTED PENSION SCHEMES (AMPS) Pensions have changed so significantly over recent years with pension freedoms, that more people are becoming engaged with retirement planning, which can only be a good thing. This does have a knock on effect for estate planning, especially because one of the biggest changes made with pension freedoms was to the death benefit of money purchase pension schemes. This doesn’t apply for final salary schemes, so for the rest of this article I will be focusing just on the money purchase options. It is often stated now that pension schemes should be the last to be touched because they offer greater benefits than just retirement income. Firstly, they are generally free from IHT on death and secondly, because you can now leave them to anyone you choose. There were two major changes made to pension benefits in 2015 that impact estate planning so let’s look at the each in turn. Intergenerational planning Prior to the changes in 2015 it was only possible to leave pension benefits as an income to a financial dependant, spouse or civil partner. Anyone else would have to take the funds as a lump sum paid from the pension. This would mean that these funds would become part of the beneficiary’s estate as well as removing them from the tax free environment of a pension. The situation we have now is that anyone can be nominated to receive the pension death benefits in the form of flexi-access drawdown, provided the scheme can facilitate it. This means that the funds will remain in the tax privileged environment of the pension. Furthermore, these funds can then be left in the same way when this beneficiary dies, to their nominated beneficiary. There is no requirement to take income and no limit on the number of generations that can benefit from this. The benefits won’t form part of the beneficiary’s estate and won’t limit the amount of pensions they can save themselves. Taxation The other big change was around the taxation of pension death benefits. We are now in a situation where the taxation of benefits is determined by the age of the member or beneficiary (if the funds have already been passed on at least once) on their date of death. They are generally paid tax free on death if the person died under the age of 75 and taxed at the recipient’s marginal rate if they died on or after age 75. This is both for income and lump sums, making death benefits incredibly tax efficient pre 75 because there is no IHT and tax free income can be drawn from the funds at any age. After the age of 75 there is still no IHT but funds will be taxed and should they be left to a trust there will be a flat rate charge of 45%. A credit for this is given when the trust pays benefits though. PENSIONS: HOW MUCH DO CHANGES OVER THE LAST FEW YEARS REALLY MAKE PENSIONS AN ESTATE PLANNING/IHT MITIGATION OPPORTUNITY? Thought Leadership What is a Gift? HMRC guidance states that, from an IHT perspective, “A gift can be: • anything that has a value, such as money, property, possessions • a loss in value when something’s transferred, for example if you sell your house to your child for less than it’s worth, the difference in value counts as a gift.” Conclusions : Taking all this into account you might believe that you should never touch your pension funds and just use them as an estate planning tool, but they are there to provide an income in retirement and this should never be forgotten. Gifts 2.3 What is a 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 can qualify for immediate IHT exemption, until seven years have passed, it is known as a Potentially Exempt Transfer (PET). If the donor does not survive the gift by seven years, the exemption fails. The PET is counted as part of the estate, and is subject to IHT. How much tax is due depends on when it was given – the rate of tax is lower for older gifts. Gifts made three to seven years before the donor’s death are taxed on a sliding scale known as ‘taper relief’. • Taper relief only applies to gifts that exceed the available NRB. • Tax payable on those gifts may be reduced in the form of taper relief. YEARS BETWEEN GIFT AND DEATH TAX PAID less than 3 40% 3 to 4 32% 4 to 5 24% 5 to 6 16% 6 to 7 8% 7 or more 0%