Inheritance Tax & Estate Planning
What is Inheritance Tax?
Long Term Care
In England
How We Can Help
Making A Will
At its simplest, it is a tax imposed on the value of your estate when you die.
This tax has been known as:
Estate Duty or Capital Transfer Tax.
But today is commonly known as Inheritance Tax.
Over the years the name may have changed, but not the effect it can have on families as they try to retain the wealth that they have built up over a lifetime of work and the savings they made for that proverbial rainy day. This tax is probably the most complex of all taxes.
What is Estate Planning ?
Well, Estate Planning is simply a series of strategies which can be put in place whilst you are alive, to minimise, or even eliminate, the liability for Inheritance Tax on your estate, when you die.
It is a sad fact that we will all be paying tax until we die.
Even if we are amongst the ones who don't pay income tax, we do pay indirect taxes such as V.A.T.
There is also a misconception that this tax is confined to the very rich and whilst this may well have been the initial intention of Government, due to several issues, not least the recent increases in property values, nowadays this tax impacts on many more families.
So Who pays the tax ?
Well the good news is that it isn’t you, simply because you are not around to pay it!!
But the bad news is that the people who must pay are the very people you would most like to benefit from your Will and usually this will most likely be your children and grandchildren. Therefore the very people to whom you would like to leave your money, as a final legacy will also inherit a tax bill, which could be very significant.
So what does this tax mean to you ?
Well, when you die, your total estate must be valued. This valuation includes all your personal assets, such as your house and all its contents, your car, money, any investments, which haven't been 'sheltered' appropriately and certain types of gifts made in the previous 7 years.
From this total, the Inland Revenue will deduct any debts and liabilities outstanding at the time of your death, and a reasonable allowance to cover funeral expenses...
If the resulting total estate, and we do mean total estate, including the lawnmower, jewellery, antiques, carpets, curtains and importantly the proceeds of any Life Policies (not written in trust) that you may have built up over the years. If that total estate is valued at less than £325,000 for tax year 2010/11 NO Inheritance Tax is payable.
This is called the 'Nil Rate Band' allowance.(NRB)
That may sound very reasonable, but when you take into account that absolutely everything is included in your estate, I think you will agree that it’s a very modest figure. All can pass to the surviving spouse as long as none of the IHT allowances have already been used, between husband and wife there is usually no IHT.
The problem has arisen that for many years the Nil Rate Band did not increase with inflation, and so a tax that perhaps was initially intended to be paid by the rich is now hitting most families.
If, as is so often the case, the total assets exceed £325,000, when you die, a tax of 40% is charged on the excess, with no exceptions.
Yes, that's right 40p in every £1 must be paid to the Inland Revenue.
How does the tax work ?
Quite simply as your estate increases in value, through inflation and investment growth, so the tax liability also increases.
As you can see...
| Estate |
£350,000 |
£400,000 |
£600,000 |
£1,000,000 |
| IHT Liability |
£10,000 |
£30,000 |
£110,000 |
£270,000 |
| % of Estate |
2.85% |
9.6% |
18.33% |
27% |
In this example we have FOUR estates valued between £350,000, & £1,000,000.
The potential Inheritance Tax liability on the smaller estate is calculated at £10,000, which is 2.85% of the overall estate.
However, when the estate doubles in value to £600,000 the liability rises to £110,000, donated to the Inland Revenue, which represents 18.33% of the estate...
But at one million pounds the Tax more than doubles to £270,000. that's almost a third of your estate going to the taxman.
It's true to say that:
THE BIGGER THE ESTATE ....the bigger the Tax bill !!!
IHT rates, allowances and thresholds are subject to change in the future and IHT liabilities are subject to individual circumstances.
What is long Term Care
Long term care is needed when a person becomes ill or suffers a disability that makes them unable to carry out their activities of daily living, with the probability that this disability will continue over the long term. More often than not, it is the elderly who require care over the longer term and it is typically occasioned by either increasing frailty due to ageing or the chronic aftermath of acute conditions such as a stroke or a fall.
Long Term Care can also be required if a person is mentally impaired. The most common form of impairment for elderly people is dementia, and a common form of dementia is Alzheimer's Disease. A person suffering from dementia will need personal supervision and assistance to carry out normal daily activities.
The care required can take many forms, from simple domestic assistance to medical interventions and may be provided in a care home or in the person's own home.
The long term nature of the care needed, and the fact the person is unlikely to recover (they have a chronic condition), is what distinguishes this situation from the conditions covered by Private Medical Insurance - which covers acute medical conditions (i.e. conditions from which a recovery is expected).
Many people would have hoped the National Health Service would look after them. They might have paid National Insurance contributions and taxes all their working lives, and recall the original intention of the Welfare State to care for people 'from cradle to grave'. But the NHS no longer covers all the costs associated with the care of incurable conditions in old age.
Since the Community Care Act, which was passed in 1990, took effect in 1993, that task has been transferred to Local Authorities. The NHS will only provide and/or pay for the Nursing Care Service Component of a person's long term care service needs. All other costs and services associated with long term care are the care recipient's responsibility unless they qualify for Local Authority assistance. Although in Scotland from July 2002 Free Personal Care has been available.
Who Pays for The Care.
One of the problems for the current generation of elderly people is that they were brought up believing that the State would look after them 'from cradle to grave.' This is not the case though, and as far as long term care costs are concerned, in general the State only pays for the least wealthy.
The provision of long term care outside hospitals has become the responsibility of individual Local Authorities and it is not free to everyone. If your Local Authority agrees that you need care home care it will assess your means to work out what proportion of the costs is your responsibility, and what the Local Authority will pay. If you can expect a contribution from the Local Authority, the Authority will contract with the care home, pay the home direct but ask that you make your contribution towards the fees to them. The size of the contribution depends on the assessment of your wealth by a means test.
Assets greater than upper means test limit
You will not be entitled to any financial assistance from the Local Authority for long term care costs in a care home - and it will usually be up to you to make all your own arrangements for care. This will normally be for those with assets over £23,000.
Assets between the means test limits
Some assistance may be given by your Local Authority. The amount of assistance takes into account all of your actual income and the 'tariff income’.
Assets below lower means test limit
You will have to give up all of your income to the Local Authority. They will top it up to meet care fees. 'Income' consists of all of your private pensions, plus most of the Social Security benefits to which you are entitled. You can, however, deduct an amount for personal spending.
Throughout the process of mitigating IHT and Long Term Care there are several key areas that we look at and these include...
Your current financial position,
Retirement planning,
Protection planning,
Investments,
Loan planning,
Tax planning . . .
and of course Inheritance tax and Long Term Care mitigation...
which can all form part of a financial planning strategy for you and your family.
Although we do realise that not all areas are appropriate to all clients, please bear in mind that they may be of significant benefit to your children, grandchildren or beneficiaries, who at the end of the day are always the ones who will benefit from efficient and successful Inheritance Tax planning.
This is why, as part of our service, we undertake to provide regular reviews for our clients, and to ensure that the implications of any changes in legislation can be fully taken into account in any required alterations to an existing strategy.
As advisers, our priority is you, it is your hard earned wealth and we will not put your position at risk simply to reduce a potential liability to this tax. When looking at investments we understand the importance of getting the balance right between risk and reward and how this balance can change over the years, which is another very good reason for those regular reviews!
IHT is quite rightly regarded as a “Voluntary Tax” as it often is only payable if no planning has taken place.
When your estate is faced with a potential liability to Inheritance tax you have 4 real options..
Reduce it ( either by spending it, or giving it away)
Cap it (stop it getting worse)
Mitigate it ( provide for payment of the tax)
Or you can PAY IT.
The final question is always the same.
How important is it to avoid this tax?
You have paid tax throughout your working life on earnings, savings and probably on investments.
You retire and you are taxed on your pension income,
And when you die they want to tax what's left,
Unless you do something about it !
Making a Will is a key part of your overall financial and estate plan. It is one of the most important documents you will ever have a hand in authoring. A properly constructed Will ensures your assets go where you want them to go and will be administered by the personal representatives you trust.
But it should go further than that. It can protect your estate from the effects of long term care costs and even help reduce your family’s inheritance tax liability. It can ensue that assets passed to a family member are secure even if that person goes through a divorce/separation from their partners
Writing a Will is often seen as a complex process involving a solicitor to get the documents written, along with its associated costs. Harris & Associates have an associated Will writing and estate planning company—Countrywide Legal Services Ltd—who will visit you at your convenience and recommend the appropriate Will for your circumstances.
It is always a comfort to know your last wishes have been documented, you have appointed guardians of your choice for your children, your prized possessions have been bequeathed and your estate will pass to your intended beneficiaries. You will also have ensured the maximum amount has been passed to the next generation without the risk of punitive Inheritance Tax charges or expensive residential care costs depleting your estate.
A Legal Consultant from Countrywide will make a free home visit to establish your circumstances on a no charge and no obligation basis. At the end of the visit, a recommendation will be made together with a fixed price quote for taking your instructions. This recommendation will take account of the financial advice given by Harris & Associates.
The following information sheets are available for download. The below documents are provided by a third party and Harris & Associates holds no liabilitiy for the content.
Will/Trust advice is not regulated by the Financial Services Authority.