Estate Planning Guide

66 ESTATE PLANNING OPTIONS JOHN D. BUNKER HEAD OF PRIVATE CLIENT KNOWLEDGE MANAGEMENT, IRWIN MITCHELL LLP CHAIR, SUCCESSION TAXES SUB-COMMITTEE OF THE CHARTERED INSTITUTE OF TAXATION Major new opportunities for saving IHT arise through effective use of RNRB. There is a real value - indeed need - for lawyers, tax advisers, financial planners and investment managers, to work together on the three elements of estate planning – legal, tax and financial planning. Some solicitors can also do the tax planning, and while financial planning is the first financial element here, that often leads on to how the investments are managed and utilised. Indeed the £2m threshold, losing RNRB by tapering with £1 lost for every £2 over the £2m limit, requires a major re-think of how assets are used and this does add great value to the inter-disciplinary process. Crucially, pension funds written in trust are not included in calculating the total “estate” for the £2m limit. With the valuable revised death benefit taxation, since 2015/16, there is for many the enticing prospect of keeping pensions intact, if the scheme allows, and being able to pass on death benefits to loved ones in a tax effective way. Anyone who has not taken advice on a pension scheme since these changes needs to review their plans, as the tax changes to pensions and RNRB make earlier advice out of date. Drawing down capital, to meet income needs, instead of taking a pension, can be an effective way of saving a 60% marginal IHT rate on capital over £2m. If you can spend capital that would be taxed at 40% and would also lose RNRB through the taper, 60% is a historically high tax rate to be saving! The two-year period post-death is crucial for making choices on pensions, e.g. whether to designate to drawdown to a specific beneficiary, but also for varying any will left by the deceased or any trust such as a discretionary trust that might need converting to a life- interest. There are many legal structures that might need revising in the two-year period, and these are particularly important for married couples (including civil partners). This can include advancing or appointing capital out of trust to a surviving spouse to enable them to “inherit” their deceased spouse’s ISA (complete with full tax free benefits, post date of death, since 6 April 2018). Many Will planning issues arise for RNRB. The ideal is for clients to be encouraged to allow their professional advisers to liaise on the planning, so that best use can be made of legal, tax and financial elements. For spouses this is best done during joint lives, if possible before retirement, but also after the first death to take stock during the two-year period. Recent research by NFU Mutual estimated that in the first nine months of RNRB, 20,000 of the 25,000 estates paying IHT did not claim RNRB. Many may have failed for lack of good planning. Some might even be rescuable within the two years, but it would be a great shame to allow this new relief to be wasted! TECHNICALITIES AND TALKING POINTS: ESTATE PLANNING IN RESPONSE TO RNRB AND THE NEW OPPORTUNITIES TO SAVE IHT Thought Leadership 67 ESTATE PLANNING OPTIONS TIMEFRAME IMPLEMENTATION COSTS RISK FLEXIBILITY MITIGATION BR 2 years from share ownership Simple Varies up to 2.5% initial and 1-3% p.a. after beating a hurdle Medium to high Between <30 days to >3 months, depending upon the service 50% or 100% EIS 2 years from share ownership (3 years for EIS qualification) Simple Varies, up to 2.5% initial and 1.5% ongoing AMC Medium to high Yes, subject to liquidity and implications to the tax reliefs 100% Trust 7 years Requires relatively complex legal structures High Depends on how assets are invested None Can be 100%, depending upon the structure (after 7 years) Gifts & PETs Some gifts are exempt, others may be subject to taper relief between years 3 and 7 from the gift Specialist advice is highly recommended Low, but there will be a charge for the advice None None - access and control is lost 100% after 7 years Life assurance As soon as the policy is in place Depends on age and health status - can be restrictive Monthly premium or lump sum - will vary depending on sum assured, age & health None Can cancel the policy, subject to costs No mitigation - just pays the bill with sum assured Pensions As soon as funds are inside the pension as long as annual and lifetime limits aren’t breached Depends on pension arrangements. Specialist advice is highly recommended Varies, around 0.85% ongoing AMC + transaction costs and taxes if the pension fund buys & sells + cost of advice Depends on how the assets are invested Big tax penalties to access funds when under 55 Usually 100% if the deceased is under 75. For over 75s, up to 55% tax is payable, depending on the size of pension pot Charitable giving As soon as the Will is in place Simple, but estate value/Will must be correct Varies, professional valuation of estate and ongoing Will updates None Can rewrite Will at any time IHT on estate reduced by 10% (to 36%) if 10% of estate is left to charity Estate planning solutions Comparison