Life insurance

Providing a financial safety net for your loved ones
Getting the right life insurance policy means working out how much money you need to protect your dependants. This sum must take into account their living costs, as well as any outstanding debts, such as a mortgage. It may be the case that not everyone needs life insurance (also known as ‘life cover’ and ‘death cover’). But if your spouse and children, partner, or other relatives depend on your income to cover the mortgage or other living expenses, then the answer is ‘yes’.

Valuing a deceased person’s estate

Responsibility for paying Inheritance Tax

To arrive at the amount payable when valuing a deceased personís estate, you need to include assets (property, possessions and money) they owned at their death and certain assets they gave away during the seven years before they died. The valuation must accurately reflect what those assets would reasonably receive in the open market at the date of death.

Inheritance Tax is payable by different people in different circumstances. Typically, the executor or personal representative pays it using funds from the deceasedís estate. The trustees are usually responsible for paying Inheritance Tax on assets in, or transferred into, a trust. Sometimes people who have received gifts, or who inherit from the deceased, have to pay Inheritance Tax – but this is not common.

Valuing the deceased personís estate is one of the first things you need to do as the personal representative. You wonít normally be able to take over management of their estate (called applying for probate or sometimes, applying for a grant of representation/confirmation) until all or some of any Inheritance Tax that is due has been paid.

The valuation process
This initially involves taking the value of all the assets owned by the deceased person, together with the value of:

their share of any assets that they own jointly with someone else
any assets that are held in a trust, from which they had the right to benefit
any assets which they had given away, but in which they kept an interest ñ for instance, if they gave a house to their children but still lived in it rent-free
certain assets that they gave away within the last seven years

Next, from the total value above, deduct everything that the deceased person owed, for example:

any outstanding mortgages or other loans
unpaid bills
funeral expenses

(If the debts exceed the value of the assets owned by the person who has died, the difference cannot be set against the value of trust property included in the estate.)

The value of all the assets, less the deductible debts, gives you the estate value. The threshold above which the value of estates is taxed at 40 per cent is currently £325,000 (frozen until April 2014).

When the executor pays Inheritance Tax
Usually, the executor, personal representative or administrator (for estates where thereís no will) pays Inheritance Tax on any assets in the deceasedís estate that are not held in trust.

The money generally comes from the deceased personís estate. However, because the tax must be paid within six months of the death and before the grant of probate can be issued (or grant of confirmation in Scotland), sometimes the executor has to borrow the money or pay it from their own funds. This can happen if it hasnít been possible to get the money from the estate in time because itís tied up in assets that have to be sold.

In these cases, the executor or the people who have advanced the money can be reimbursed from the estate before itís distributed among the beneficiaries.

When a trustee pays Inheritance Tax
Inheritance Tax on transfers into trust is only necessary if the total transfer amount is above the Inheritance Tax threshold. Itís usually payable by the person making the transfer(s) – known as the settlor – not the trustees.

The trustees must pay any Inheritance Tax due on land or assets already held in trust. The occasions for this include:

a transfer out of trust (known as the exit charge)
every ten years after the original transfer into trust (known as the ten-year anniversary charge)
when the beneficiary of the trust (known as the life tenant) dies – interest in possession trusts only

When a beneficiary or a donee has to pay Inheritance Tax
If the executor or the trustees canít pay the Inheritance Tax, the beneficiaries or donees (recipients of gifts made during a personís lifetime) may have to pay it. A beneficiary or donee only has to pay Inheritance Tax in this case if:

they receive a share of an estate after a death
they receive a gift from someone who dies within seven years of making the gift
they benefit from assets in a trust at the time of death or receive income from those assets
they are the joint owner – other than a spouse or a registered civil partner – of a property

Doubling the Inheritance Tax threshold

Transferring assets can seriously improve your wealth

Current rules mean that the survivor of a marriage or registered civil partnership can benefit from up to double the Inheritance Tax threshold – £650,000 in the current tax year, in addition to the entitlement to the full spouse relief.

Inheritance Tax is only paid if the taxable value of your estate when you die is over £325,000. The first £325,000 of a person’s estate is known as the Inheritance Tax threshold or nil rate band because the rate of Inheritance Tax charged on this amount is currently set at zero per cent, so it is free of tax.

Transferring exempt assets
Where assets are transferred between spouses or registered civil partners, they are exempt from Inheritance Tax. This can mean that if, on the death of the first spouse or registered civil partner, they leave all their assets to the survivor, the benefit of the nil rate band to pass on assets to other members of the family, normally the children, tax-free is not used.

Where one party to a marriage or registered civil partnership dies and does not use their nil rate band to make tax-free bequests to other members of the family, the unused amount can be transferred and used by the survivor’s estate on their death. This only applies where the survivor died on or after
9 October 2007.

In effect, spouses and registered civil partners now have a nil rate band that is worth up to double the amount of the nil rate band that applies on the survivor’s death.

Since October 2007, you can transfer any of the unused Inheritance Tax threshold from a late spouse or registered civil partner to the second spouse or civil partner when they die. This can currently increase the Inheritance Tax threshold of the second partner from £325,000 to as much as £650,000, depending on the circumstances.

Spouse or registered civil partner exemption
Everyone’s estate is exempt from Inheritance Tax up to the current £325,000 threshold (frozen until April 2014).

Married couples and registered civil partners are also allowed to pass assets from one spouse or registered civil partner to the other during their lifetime or when they die without having to pay Inheritance Tax, no matter how much they pass on, as long as the person receiving the assets has their permanent home in the UK. This is known as spouse or registered civil partner exemption.

If someone leaves everything they own to their surviving spouse or registered civil partner in this way, it’s not only exempt from Inheritance Tax but it also means they haven’t used any of their own Inheritance Tax threshold or nil rate band. It is therefore available to increase the Inheritance Tax nil rate band of the second spouse or registered civil partner when they die, even if the second spouse has re-married. Their estate can be worth up to £650,000 in the current tax year before they owe Inheritance Tax.

To transfer the unused threshold, the executors or personal representatives of the second spouse or civil partner to die need to send certain forms and supporting documents to HM Revenue & Customs (HMRC). HMRC calls this transferring the nil rate band from one partner to another.

Transferring the threshold
The threshold can only be transferred on the second death, which must have occurred on or after 9 October 2007 when the rules changed. It doesn’t matter when the first spouse or registered civil partner died, although if it was before 1975 the full nil rate band may not be available to transfer, as the amount of spouse exemption was limited then. There are some situations when the threshold can’t be transferred but these are quite rare.

When the second spouse or registered civil partner dies, the executors or personal representatives of the estate should take the following steps.

Calculating the threshold you can transfer
The size of the first estate doesn’t matter. If it was all left to the surviving spouse or registered civil partner, 100 per cent of the nil rate band was unused and you can transfer the full percentage when the second spouse or registered civil partner dies even if they die at the same time.

It isn’t the unused amount of the first spouse or registered civil partner’s nil rate band that determines what you can transfer to the second spouse or registered civil partner. It’s the unused percentage of the nil rate band that you transfer.

If the deceased made gifts to people in their lifetime that were not exempt, the value of these gifts must first be deducted from the threshold before you can calculate the percentage available to transfer. You may also need to establish whether any of the assets that the first spouse left could have qualified for Business or Property Relief.

Supporting a claim
You will need all of the following documents from the first death to support a claim:

a copy of the first will, if there was one
a copy of the grant of probate (or confirmation in Scotland), or the death certificate if no grant was taken out
a copy of any deed of variation if one was used to vary (or change) the will

If you need help finding these documents from the first death, get in touch with the relevant court service or general register office for the country you live in. The court service may be able to provide copies of wills or grants; the general register offices may be able to provide copies of death certificates

The relevant forms
You’ll need to complete form IHT402 to claim the unused threshold and return this together with form IHT400 and the forms you need for probate (or confirmation in Scotland).

You must make the claim within 24 months from the end of the month in which the second spouse or registered civil partner dies.

Inheritance tax nil rate band and rates

We can help you evaluate the size of your estate

We can help you evaluate the size of your estate – which could include assets such as property, pensions, shares and personal property – and identify the opportunities that will help you avoid or reduce the amount of Inheritance Tax your family will have to pay on your estate and enable you to preserve wealth for your dependents if the worst comes to the worst.

We can advise on making appropriate provisions for vulnerable beneficiaries, protecting their resources whilst continuing to benefit from them. You may also want to consider appointing a Lasting Power of Attorney who can manage your affairs in the event you become unable to do so.

Our aim is to maximise the inheritance your beneficiaries will receive, avoiding or minimising the amount of Inheritance Tax your family will have to pay on your estate, ensuring plans are in place to protect your property so that you are not forced to sell your home to pay for your care home costs should the need arise.

We are on hand to provide straightforward, up-to-date advice. We will assess your situation and provide advice on a number of tax migration solutions, creating bespoke estate protection planning strategies that are tailored to suit you and your circumstances.

Protecting your wealth

Passing on assets without having to pay Inheritance Tax

A good estate planning and protection strategy can provide you and your family peace of mind that provisions are set in place for the disposal of your estate upon your death, securing your assets for the benefit of your heirs. Many people are surprised at how large their estate would be if they take into account the value of their home, life insurance policies not written in an appropriate trust and in some cases death in service benefits.

Inheritance Tax is the tax that is paid on your estate, chargeable at a current rate of 40 per cent. Broadly speaking, this is a tax on everything you own at the time of your death, less what you owe. It’s also sometimes payable on assets you may have given away during your lifetime. Assets include property, possessions, money and investments. One thing is certain: careful planning is required to protect your wealth from a potential Inheritance Tax liability.

Not everyone pays Inheritance Tax on their death. It only applies if the taxable value of your estate (including your share of any jointly owned assets and assets held in some types of trusts) when you die is above the current £325,000 (frozen until April 2014) threshold or nil rate band. It is only payable on the excess above this amount.

Inheritance Tax exemptions and reliefs
Sometimes, even if your estate is over the threshold, you can pass on assets without having to pay Inheritance Tax. Examples include:

Spouse or registered civil partner exemption: Your estate usually doesn’t owe Inheritance Tax on anything you leave to a spouse or registered civil partner who has their permanent home in the UK – nor on gifts you make to them in your lifetime – even if the amount is over the threshold.

Charity exemption: Any gifts you make to a qualifying charity – during your lifetime or in your will – will be exempt from Inheritance Tax.

Potentially exempt transfers: If you survive for seven years after making a gift to someone, the gift is generally exempt from Inheritance Tax, no matter what the value.

Annual exemption: You can give up to £3,000 away each year, either as a single gift or as several gifts adding up to that amount – you can also use your unused allowance from the previous year but you use the current year’s allowance first.

Small gift exemption: You can make small gifts of up to £250 to as many individuals as you like tax-free.

Wedding and registered civil partnership gifts: Gifts to someone getting married or registering a civil partnership are exempt up to a certain amount.

Business, Woodland, Heritage and Farm Relief: If the deceased owned a business, farm, woodland or National Heritage property, some relief from Inheritance Tax may be available.

Transfers of assets into most trusts and companies will become subject to an immediate Inheritance Tax charge if they exceed the Inheritance Tax threshold (taking into account the previous seven years’ chargeable gifts and transfers).

In addition, transfers of money or property into most trusts are also subject to an immediate Inheritance Tax charge on values that exceed the Inheritance Tax threshold. Tax is also payable ten-yearly on the value of trust assets above the threshold; however, certain trusts are exempt from these rules.

Gifts and transfers made in the previous seven years
In order to work out whether the current Inheritance Tax threshold of £325,000 has been exceeded on a transfer, you need to take into account all chargeable (non-exempt, including potentially exempt) gifts and transfers made in the previous seven years. If a transfer takes you over the nil rate band, Inheritance Tax is payable at 20 per cent on the excess.

‘Nothing is certain but death and taxes’ – and they are intrinsically linked

Will your legacy involve just leaving a large Inheritance Tax bill for your loved ones?

In order to protect your family and business, it is essential to have provisions in place after you’re gone. The easiest way to prevent unnecessary tax payments such as Inheritance Tax is to organise your tax affairs by obtaining professional advice and having a valid will in place to ensure that your legacy does not involve just leaving a large Inheritance Tax bill for your loved ones.

Saving your beneficiaries thousands of pounds
Effective Inheritance Tax planning could save your beneficiaries thousands of pounds, maybe even hundreds of thousands depending on the size of your estate. At its simplest, Inheritance Tax is the tax payable on your estate when you die if the value of your estate exceeds a certain amount. It’s also sometimes payable on assets you may have given away during your lifetime, including property, possessions, money and investments.

Inheritance Tax is currently paid on amounts above £325,000 (£650,000 for married couples and registered civil partnerships) for the current 2013/14 tax year, at a rate of 40 per cent. If the value of your estate, including your home and certain gifts made in the previous seven years, exceeds the Inheritance Tax threshold, tax will be due on the balance at 40 per cent.

Leaving a substantial tax liability
Without proper planning, many people could end up leaving a substantial tax liability on their death, considerably reducing the value of the estate passing to their chosen beneficiaries.

Your estate includes everything owned in your name, the share of anything owned jointly, gifts from which you keep back some benefit (such as a home given to a son or daughter but in which you still live) and assets held in some trusts from which you have the right to receive an income.

Against this total value is set everything that you owed, such as any outstanding mortgages or loans, unpaid bills and costs incurred during your lifetime for which bills have not been received, as well as funeral expenses.

Any amount of money given away outright to an individual is not counted for tax if the person making the gift survives for seven years. These gifts are called ‘potentially exempt transfers’ and are useful for tax planning.

Potentially exempt transfers
Money put into a ‘bare’ trust (a trust where the beneficiary is entitled to the trust fund at age 18) counts as a potentially exempt transfer, so it is possible to put money into a trust to prevent grandchildren, for example, from having access to it until they are 18.

However, gifts to most other types of trust will be treated as chargeable lifetime transfers. Chargeable lifetime transfers up to the threshold are not subject to tax but amounts over this are taxed at 20 per cent, with up to a further 20 per cent payable if the person making the gift dies within seven years.

Some cash gifts are exempt from tax regardless of the seven-year rule. Regular gifts from after-tax income, such as a monthly payment to a family member, are also exempt as long as you still have sufficient income to maintain your standard of living.

Combined tax threshold
Any gifts between husbands and wives, or registered civil partners, are exempt from Inheritance Tax whether they were made while both partners were still alive or left to the survivor on the death of the first. Tax will be due eventually when the surviving spouse or civil partner dies if the value of their estate is more than the combined tax threshold, currently £650,000.

If gifts are made that affect the liability to Inheritance Tax and the giver dies less than seven years later, a special relief known as ‘taper relief’ may be available. The relief reduces the amount of tax payable on a gift.

Leaving a tax liability
Inheritance Tax can be a complicated area with a variety of solutions available and, without proper tax planning, many people could end up leaving a tax liability on their death, considerably reducing the value of the estate passing to chosen beneficiaries. So without Inheritance Tax planning, your family could be faced with a large tax liability when you die. To ensure that your family and business benefits rather than the government, it pays to plan ahead. As with most financial planning, early consideration is essential.

Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested.

Which investments are right for you?

Assessing how best to achieve your goals

Building an investment portfolio can be a daunting challenge. However, if you are seeking to save over the long-term, perhaps for retirement or school fees, it may be worth taking the time to assess how best to achieve your goals.

Income or capital growth or a mixture of both
You need to consider which investments are right for you. It is easy to be tempted by the potential for short-term profits, particularly with interest rates so low, but you must also consider your ability to cope with losses, as any investment comes with risks. Knowing what you are prepared to lose helps establish your overall risk profile. Other considerations might include your level of financial understanding and whether you require an income or capital growth or a mixture of both.

Constructing your portfolio carefully
Once you have established these objectives, it is important to construct your portfolio carefully and continue to review it on a regular basis. What one person might consider cautious, another might consider risky, so it is important to understand your needs and seek professional financial advice.

Past performance is not necessarily a guide to the future. The value of investments and the income from them can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. Tax assumptions are subject to statutory change and the value of tax relief (if any) will depend upon your individual circumstances.

Boosting retirement saving among UK workers

Millions of people are not saving enough to have the income they are likely to want in old age

Up to 11 million workers will now start to be automatically enrolled into a workplace pension which commenced from October last year. Larger employers were the first, with small and medium-sized employers following over the next six years.

A workplace pension is a way of saving for retirement arranged by an individual’s employer. It is sometimes called a ‘company pension’, an ‘occupational pension’ or a ‘works pension’.

The fact is that millions of people are not saving enough to have the income they are likely to want in retirement. Life expectancy in the UK is increasing and at the same time people are saving less into pensions.

In 1901, for every pensioner in the UK there were 10 people working. In 2010, for every pensioner there were 3 people working. By 2050, it is expected that this will change to just 2 workers.

Automatically enrolling workers
Auto-enrolment is the Government’s key strategy to boost retirement saving among UK workers, at a time when employers have been closing company schemes, particularly the most generous final-salary pensions.

Employers will automatically enrol workers into a workplace pension who:

  • are not already in a qualifying pension scheme
  • are aged 22 or over
  • are under State Pension age
  • earn more than £9,440 a year (this figure is reviewed every year), and work or usually work in the UK

Required by law
For the first time employers are required by law to automatically enrol all eligible workers into a workplace pension and make a contribution to it. The Pensions Regulator is responsible for ensuring employers comply with the new law and have produced guidance to help employers to do this. They will write to each employer before the date they are required to start enrolling workers into a workplace pension, and depending on employer size, on at least one other occasion.

One of the employer duties relating to automatic enrolment is that employers are required by law to provide the right information in writing, to the right individual at the right time, so that people know how automatic enrolment will affect them.

Dates for your diary
The date on which workers are enrolled, called a staging date, depends on the size of the company they work for and is being rolled out over the next six years.

Large employers (with 250 or more workers) started automatically enrolling their workers from October 2012 to February 2014

Medium employers (50 – 249 workers) will have to start automatically enrolling their workers from April 2014 to April 2015

Small employers (49 workers or fewer) will have to start automatically enrolling their workers from June 2015 to April 2017

New employers (established after April 2012) will have to start automatically enrolling their workers from May 2017 to February 2018

Once The Pensions Regulator has notified employers of their date to enrol eligible workers into a workplace pension, employers can choose to postpone automatic enrolment for up to three months from that date. If they choose to postpone, employers must inform those workers in writing, including notice of their right to opt-in before the end of the postponement period.

Employers can also use the ‘postponement period’ for any newly eligible workers.

National Employment Savings Trust (NEST)
NEST is a trust-based, defined contribution pension scheme. It was specifically established to support automatic enrolment and make sure all UK employers have access to a suitable pension scheme for their employer duties. The scheme is not-for-profit and the Trustee has a legal duty to act in its members’ best interests. It is designed to be straightforward and easy for employers to use.

NEST offers a low-cost way for people to put money away for their retirement. NEST members have one retirement pot for life that they can keep paying into if they stop working for a period or become self-employed.

Tax-free lump sum
Most people will be automatically enrolled into a Defined Contribution scheme or money purchase scheme. This means that all the contributions paid into your pension are invested until you retire.

The amount of money you have when you retire depends on how much has been paid in and how well investments have performed. In most schemes when you retire you can take some of your pension as a tax-free lump sum and use the rest to provide a regular income.
The Government has set a minimum amount of money that has to be put into a Defined Contribution scheme by employers and workers.

Contribution levels
The minimum contribution level is just that, a minimum. Employers will be able to contribute more than the minimum if they wish, and many already do. Individuals can also contribute more than the minimum if they want to. These amounts can be phased in to help both the employers and employees manage costs.

Some people may be automatically enrolled into a Defined Benefit or Hybrid pension scheme. This type of scheme may also be known as a ‘final salary’ or ‘career average’ scheme. If you are enrolled into one of these schemes, the amount you get when you retire is based on a number of things, which may include the number of years you’ve been a member of the pension scheme and your earnings. In most schemes you can take some of your pension as a tax-free lump sum and the rest as a regular income.

Alternative arrangements can apply for Defined Benefit and Hybrid pension schemes to help them manage the introduction of auto enrolment. For example, the full provisions can be postponed until 30 September 2017 for existing scheme members. New staff will have to be enrolled from the employer’s staging date.

If employers or individuals do not know what type of scheme they are using for automatic enrolment, their employer will be able to tell them.

Challenges of this new legislation
Not surprisingly, with new legislation comes new jargon and employers will need to become familiar with terms such as ‘eligible jobholders’ and ‘qualifying pension schemes’ when considering their duties.

We can help you through the challenges of this new legislation and provide a full analysis of your options, so that you can identify and implement an agreed plan that best suits your requirements.

Greater clarity on how much care in ‘old age’ may cost

Cap provides long-term savers with a greater idea of future spending

In his Budget speech delivered in March, the Chancellor, Mr Osborne, said this was a Budget for ‘an aspiration nation’. He explained this meant ‘helping those who want to keep their home instead of having to sell it to pay for the costs of social care.’ The confirmation of a £72,000 cap on social care costs provides long-term savers with a greater idea of future spending, but doesn’t cover additional costs incurred in a residential care home.

Cost of care
Savers who were hoping that the Budget 2013 announcement around social care would provide greater clarity on how much their ‘old age’ may cost them could be disappointed to find out that they will still have to foot the bill for uncapped ‘hotel costs’ incurred in a care home, such as food and board.

Means testing limit
Despite an increase in the means testing limit covering total care costs (social care and ‘hotel costs’) to £118,000, many whose estate is worth more than the limit will have to pay for the bill themselves. This means the majority of home owners will still find themselves in the uncertain position of not knowing how much their old age will cost.

High care home fees
People may be surprised that the social care cap does not cover their total care bill. This will result in many pensioners and elderly people having to prepare for high care home fees. Some may even find themselves in the unfortunate position of having to sell their assets to fund their old age. It is important for those who find themselves near or over the means testing threshold to prepare for the financial burden that may be placed upon them to avoid undesired consequences.

Will you be left to pick up the pieces?
The future of social care is one of the most important issues facing the country. All too often the NHS and families are left to pick up the pieces when older people fail in their struggle to cope alone. If you are concerned about how this could impact on you or a family member, please contact us to review your requirements.

Flexible drawdown rules untouched by Budget 2013

Greater opportunities for those with over £20,000 pension income

The eligibility rules for flexible income drawdown from pensions were untouched by Budget 2013, which is welcome news if this is something you are considering or would like to find out more about. Flexible income drawdown is a type of income withdrawal where you can take pension income direct from your pension fund without having to purchase an annuity. Ordinarily, there are limits on the maximum income you can take under income withdrawal (known as ‘capped drawdown’).

Provided you have a secured pension income of over £20,000 ‘Minimum Income Requirement’ a year (which can include any State pension), you could be eligible to use flexible income drawdown in respect of your money purchase pension savings.

Amount of income
Under flexible income drawdown there is no limit on the amount of income you can take in any year. You can tailor your drawdown pension to suit your personal requirements, whether taking regular amounts at a set frequency or ad hoc income when required. There is even the option to draw the entire fund in one go. All income withdrawal payments are subject to income tax under PAYE at your appropriate marginal rate.

Tax-efficient
Flexible income drawdown is tax-efficient, particularly where you wish to ‘phase in’ the use of your pension savings to provide that income. Any money left in drawdown on death is subject to a 55 per cent tax charge, whereas any untouched pension fund money (pre age 75) can pass on to your beneficiaries free of tax.

Once you go into flexible income drawdown you can no longer make tax-efficient pension contributions, so you should look to maximise all allowances, including carry forward, this tax year.

Flexible income drawdown is a complex area. If you are at all uncertain about its suitability for your circumstances we strongly suggest you seek professional financial advice. This is a high-risk option which is not suitable for everyone. If the market moves against you, capital and income will fall. High withdrawals will also deplete the fund, particularly leaving you short on income later in retirement.

At a time when people are being squeezed by the taxman, anything that helps save tax should be considered, and the potential to avoid the 55 per cent tax charge on part of those savings on death could result in significantly more of their estate being passed on to beneficiaries.

Flexible income drawdown is a complex area. If you are at all uncertain about its suitability for your circumstances you should seek professional financial advice. Your income is not secure. Flexible income drawdown can only be taken once you have finished saving into pensions. You control and must review where your pension is invested, and how much income you draw. Poor investment performance and excessive income withdrawals can deplete the fund.