William, Mary and The Taxman Case Study
William and Mary have been married for over 30 years and have two grown up children – Polly aged 25 and Mark aged 28.
William and Mary have been thinking about putting mirror Wills in place – like many couples they want to give everything to each other and then make sure the assets go to Polly and Mark equally, so their intentions are straightforward.
They have been doing their own research and know that they are both entitled to a personal IHT allowance of £325,000 and can double this up to £650,000 because they are married. They also know that if they leave everything to each other, they can take advantage of the spouse exemption that allows them to leave any amount to each other without any IHT being due. Their individual estates would be worth around £500,000 each.
Unfortunately, William dies before they get around to making their Wills. Under the laws of intestacy, Mary will only inherit the first £250,000 of William’s estate (together with his personal possessions). The rest of William’s estate will be split into two equal parts, with Mary inheriting one half and Polly and Mark sharing the other half. Mary is therefore entitled to £375,000 instead of the full amount.
In IHT terms, only the £375,000 that goes to Mary is spouse exempt – leaving the £125,000 that is inherited by Polly and Mark taxable at 40%.
Instead of all of the estate passing to Mary and being exempt as William wished, there is a completely avoidable tax bill of £50,000 due to the Taxman.
This is only a relatively “simple” illustration in that fairly standard planning measures would have alleviated the issue. Of course there are far more complex situations that we encounter on a day to day basis and we can help advise on the best course of action for all of them.
Please don’t let this kind of thing happen to you. This scenario, and the pain that comes with it, can be avoided by putting in careful estate planning measures such as the ones recommended by our expert Estate Planning Advisers, so contact LPA Guardian to see how we can help you.
THE LEGAL BIT – YOUR SUCCESS – TAX IMPLICATIONS: PROTECT YOUR WEALTH, DON’T GIVE IT AWAY
HMRC’s own statistics show that the amount of Inheritance Tax it has collected since the 2009/2010 tax year has doubled. This seems like an incredible rise in HMRC’s takings – and a large proportion of it is down to the increase in house prices pushing estates over the Inheritance Tax threshold. What’s more, one study has suggested that the number of families hit with an Inheritance Tax bill will rise by an eye-watering further third this year.
So, it’s great that you’re doing well at work and earning more money which allows you to perhaps buy property and give you a more comfortable lifestyle. The other side of that success, however, is that it may – quite understandably – bring concerns about the impact of taxation with it.
In this kind of climate, the bottom line is that you will have worked hard for what you’ve got, and you will want to keep it. You’ll also want to make sure that you are able to pass as much on to your loved ones as you can without losing out to the Taxman. These are all perfectly natural instincts and concerns, and ones that we hear on a daily basis.
It’s amazing how many ways your wealth can be eroded during (and after) your lifetime, and conversely how acquiring more assets can increase your anxiety as your tax burden potentially rises.
Looking at it from an estate planning perspective, the main tax liabilities of concern are:
- Inheritance Tax (IHT) – while you are alive and after you’ve gone; and
- Capital Gains Tax (CGT) – while you are still alive, and applicable to any gains you make when selling certain assets such as property other than your principal private residence.
The IHT threshold is currently £325,000 per person which means that you can leave up to £325,000 worth of assets to your beneficiaries without having to pay any IHT – this is the Nil Rate Band (NRB). However, some facts to bear in mind are:
- Anything above the £325,000 NRB is taxed at a flat 40% rate.
- Married couples and civil partners can “double up” their NRB – but unmarried or co-habiting couples cannot! A married couple who leave each other their assets can therefore leave up to £650,000 without paying IHT.
- There is now a “new” Residence Nil Rate Band (RNRB) which will give couples an extra exemption up to £1 million by the year 2021. But – this new relief is only available in certain, somewhat limited circumstances, so there are some narrowly specific hoops to jump through in order to benefit.
It’s no wonder that your thoughts might turn to exploring what you can do about it.
Strategies you could use to minimise your IHT exposure
As part of our expert service at LPA Guardian, we would always seek to reduce your IHT liability wherever possible – looking at it as part of your wider estate planning goals. These are complex areas, and everyone’s circumstances are different, but some of the issues we would consider are:
- Looking at your personal situation – we’d work out the value of your estate and the potential IHT liability and identify where your IHT exposure is and why, and what we can do to bring it down.
- Options during your lifetime – do you need all of your assets? How much do you actually need to live on? Make sure to plan this out as you age as your needs and priorities are bound to change.
- Minimising your estate – is there a better way to hold your assets? Will those assets go to the right people in the most tax efficient way?
- Looking at your Property – usually your home will be your largest asset – what’s the best way to own it?
- Use of Trusts – is it appropriate to use Trusts – either in your Will or during your lifetime – to achieve your aims?
- Allowances – are there any existing allowances you can use to your advantage?
- Other options – what else can we do as part of a holistic process to ensure you peace of mind – should you give assets away for instance?
All of these strategies are possibilities – but implementing them properly involves taking proper advice on their impact and finding out what is best for you.
At LPA Guardian, we can help you plan for any eventuality and put the correct kind of estate planning in place.