Estate Planning Guide

63 62 ESTATE PLANNING OPTIONS ESTATE PLANNING OPTIONS Purchased Life Annuities and Back-to-Back Schemes A “back-to-back” scheme is a combination of a purchased life annuity (“PLA”), which is purchased with the client’s capital, and a life assurance policy (“LAP”), effected subject to trust and funded by the income derived from the annuity. A proportion of the income received from the PLA will be tax-free as it is simply a return of the purchasers’ capital. The remaining portion of each annuity payment is deemed to be taxable income as it is interest on the capital. The LAP would be effected under trust as described in section 2.4, with a view to taking the sum assured outside the client’s estate. Premiums funded with the capital element of the annuity income will not be eligible for treatment as a gift out of income. Regular gifts out of income are potentially exempt and for IHT purposes this makes it irrelevant whether or not the donor survives for seven years. For the exemption to apply, it must be shown that a transfer of value meets three conditions: 1. It formed part of the transferor’s normal expenditure and was regular 2. It was made out of income (taking one year with another), and 3. It left the transferor with enough income to maintain his/her normal standard of living Nevertheless, premiums funded with the capital element of the annuity income may fall within the annual exemption for gifts to the extent that these have not already been used. If any element of the premiums is not exempt from IHT, the premiums will be treated as CLTs. The capital applied to purchase the PLA immediately reduces the value of the client’s estate as the money has been spent. The beneficiaries will usually benefit not only from the reduction on IHT payable on the reduced estate, but also from the sum assured under the LAP which they will ultimately inherit. However, caution does need to be exercised with these arrangements and the following are important considerations: • Full medical evidence should be sought in relation to every life assured under both the PLA and the LPA. • Generally, any form of packaged back- to-back arrangement should be avoided and the PLA and the LPA be established as completely separate operations. 2.9 People do not plan enough financially for old age. There are also misconceptions as to the level of funding the Government will provide to those who require assistance. OCCASIONAL PAPER 31, FINANCIAL CONDUCT AUTHORITY, SEPTEMBER 2017 Care Fees Planning The Association of British Insurers have noted that public awareness of these products remains low. Bearing in mind the ageing population, this means there may be a significant opportunity to add value to clients where professionals have an awareness and understanding of the various options. Clients in later life generally want their financial planning to give them accessible funds for their own needs, including care costs and to ensure that their estate is passed to their heirs as intact as possible. This is a balancing act between removing capital from the taxable estate and retaining access to funds. Some clients are also interested in sheltering capital against assessment by local authorities. This may be achievable via some planning routes but it is important to take into account the rules on Intentional Deprivation of Capital (see Annex E of the Care and Support Statutory Guidance). The statutory guidance in support of the Care Act 2014 states that deprivation of assets is where a person has intentionally deprived or decreased their overall assets in order to reduce the amount they will be charged towards their care and support. This means that they must have known that they would need care and support and have reduced their assets in order to reduce the contribution they would be asked to make towards the cost of it. So, where estate planning is the main objective in the client’s mind, and it is undertaken at a time when the client is fit and healthy (especially if medical underwriting supports this) then there is a valid defence. Of course, other clients may strongly prioritise meeting their care fees above the efficient passing on of their wealth. If this is the case, one of the following may be suitable while still allowing an emphasis to be placed on estate planning. Care Fees Annuities To qualify for these, clients must be: • 60 years old or above • In need of or receiving care because they can not carry out one or more of the Activities of Daily Living* The client purchases an annuity income, generally to be paid on a monthly basis for the remainder of their life. If the monthly benefit is paid directly to the care provider, it is not taxable on the client. It stops when the client dies, so if he or she dies relatively quickly, there could be loss of capital, although some capital protection can be built in. Also, as an estate planning tool, the cost of a care fees annuity immediately reduces the estate value. That might bring the RNRB back into play, but will also mean the “true” cost of the annuity to the estate is effectively reduced to only 60% of its purchase cost (40% IHT would have been lost had the annuity purchase not been made). As a result, the “break even” period a client needs to survive in order to generate a “profit” on the annuity drops substantially. Each plan is individually underwritten, meaning the annuity rate depends on the applicant’s age and state of health. And if the client moves care provider, so can the monthly benefit. 2.10 ”Activities of Daily Living (ADL)” are routine activities that people tend do every day without needing assistance. There are six basic ADLs: eating, bathing, dressing, toileting, transferring (walking) and continence.