wealth, health and inheritance briefing · the surviving spouse or another beneficiary. if the...
TRANSCRIPT
We have recently seen an increase in instructions from clients whose deceased partner’s Will includes a nil rate band discretionary trust (nrbt) which was not set up or terminated following their spouse’s death. We set out the problem and explain why nrbts must not be ignored.
Pre-2007 popularity of nrbts
Nrbts were frequently included in Wills made before 2007 in order to use the inheritance tax nil rate band of each of a married couple and thereby significantly reduce the couple’s combined inheritance tax bill. After 2007 the use of nrbts declined significantly following the introduction of the transferable nil rate band for spouses and civil partners which meant that (in most cases) using the nil rate band on the first death no longer achieved an inheritance tax saving.
Why do some Wills still include nrbts?
In some cases a couple may not have reviewed their Will since it was made pre-2007. In other cases a review may have been carried out, but if no other changes were required, a couple would usually be advised that there was no need to make a new Will to remove a nrbt. This is because a nrbt is a discretionary trust which is very flexible. This enables a decision to be made at the time of the first death, taking into account all the circumstances then in force, as to whether the trust should be retained or whether it should be terminated in favour of the surviving spouse or another beneficiary. If the trust is terminated in favour of the surviving
spouse within two years of the first death then spouse exemption is available on the first death and a full transferable nil rate band is available to the second spouse.
Why retain a nrbdt after review on the first death?
In some circumstances it is advantageous to retain the trust. Perhaps, for example, at the time of the first death the surviving spouse has become frail and anticipates that they might require residential care. If the trust is retained the assets in it will be disregarded in assessing the amount of the financial help that the surviving spouse might require from the local authority towards payment of their care fees. Similarly, the estate might include an asset at the time of the first death that is likely to increase significantly in value in the coming years (a plot of land where planning permission for development is expected to be granted, for example). In that circumstance it may be advisable to appropriate the asset to the nrbt in order that the expected increase in value can take place outside of the surviving spouse’s estate.
If the trust is to continue then it is necessary to transfer the trust assets into the names of the nrbt trustees. This may require legal documentation, such as an assent or transfer (in the case of land).
Continued on page 2
Nil rate band discretionary trusts: don’t ignore them
Welcometo the January 2018 issue of WHIB and a happy new year to you all.
Sadly we find that divorce instructions often increase in the post-Christmas period and in this issue we look at two related concerns: pre and post nuptial
settlements which can help protect wealth if your client’s marriage breaks down; and the implications for their Will and inheritance tax bill.
We also summarise the findings of the research recently issued by the government on the use of inheritance tax reliefs and look at why your clients should never ignore a nil rate band discretionary trust in their deceased partner’s Will.
Finally this month we introduce you to our talented Birmingham Private Capital team led by partner Erica Burt-Moore who we were pleased to welcome to the firm recently.
Anthony Fairweather Managing director 0345 209 1265 [email protected]
Wealth, Health and Inheritance Briefing
January 2018
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02 Wealth, Health and Inheritance Briefing January 2018
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The trust may be set up by loaning the assets that would otherwise comprise the trust funds to the surviving spouse, either by an unsecured loan or by a loan secured over the first spouse’s property. If this option is chosen a trustees’ resolution recording the agreement to proceed in this way will be necessary (at the very least) and loan documentation should be drawn up, possibly including an equitable charge over the deceased’s property interest.
When would you bring the nrbt to an end on the first death?
If there are no special circumstances similar to those outlined above, then the best course of action might be for the assets in the nrbt to pass to the surviving spouse as they can then use the transferable nil rate band on the second death when it may have increased in its amount. The surviving spouse then does not need to worry about an ongoing trust. If the trust is to be terminated in the surviving spouse’s favour then it is essential that this is done within two years of the first death so that the transferable nil rate band is available. A formal deed of appointment will need to be drawn up to implement this.
Discretionary trusts: continuedWhat if nothing at all is done on the first death?
If more than two years have passed since the first death it will not be possible for the deceased spouse’s nil rate band to be claimed by the surviving spouse. Although it is possible for the nrbt to be constituted retrospectively, it is easier, less time consuming, cheaper and generally preferable to take action immediately after the first spouse dies when all options are still open.
If your client’s deceased spouse had a nrbt in their Will, the client should be advised to take action as soon as possible as ignoring the nrbt will store up problems for the future.
For further information please contact:Carol CumminsConsultant0845 209 1275 [email protected]
In November the government published some research it had commissioned on the influence inheritance tax reliefs, such as agricultural and business property relief, have on taxpayers’ behaviour and decisions.There was no accompanying announcement of a consultation, and no further comment, so we are a little in the dark as to the government’s motivation. Possibly the report was commissioned in response to a review carried out in 2014 by the National Audit Office (NAO) showing that inheritance tax (IHT) reliefs are expensive in terms of tax foregone.
The NAO reported that the cost of agricultural property relief (APR) and business property relief (BPR) (which can exempt assets completely from IHT after two years ownership) had increased by more than half since 2008/09. This resulted in the Public Accounts Committee calling on the government to justify the money spent.
What does the research show?
The research highlights that clients in general have “quite a limited” understanding of IHT and “few [are] aware of APR/BPR”. In carrying out estate planning, clients are focussed on their wealth passing on intact to their children and preserving family tradition, with reducing IHT being a measure that is taken in support of these aims rather than being an aim in itself. Owners of agricultural assets have a particularly high sense of tradition with business owners having a lower concern for this, perhaps because farms are more likely to have been owned by the same family for generations.
The researchers found that assets “were rarely purchased specifically to make use of APR/BPR”. Trusts are used on a regular basis but are most often used to manage and protect assets, keep them intact and ensure equal division among the family rather than tax mitigation being the over-riding motivation. Farming families are particularly concerned about the farm being kept intact given that the very viability of the business could be threatened if ownership is divided. Agents reported to the researchers that clients rarely purchased assets simply to benefit from APR/BPR or reduce their IHT liability. Occasionally clients would buy AlM shares or EIS investments solely for the tax advantages but the agents highlighted that this carried a degree of commercial risk.
What of the future?
Concern has been bubbling under for some years that the benefits of APR/BPR might be diluted in some way, particularly in light of the criticism of their expense. This research might make change less likely as it would appear that the vast majority of taxpayers are utilising the reliefs in the way intended: to enable a business
or farming enterprise to be preserved for the future without the payment of large IHT liabilities leading to a forced sale and the possible
dissolution of the business.
For further information please contact:David MaddockPartner0845 209 1205 [email protected]
Inheritance tax: the use and influence of exemptions and reliefs
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As with any litigation, there is much risk and uncertainty in having a divorce financial settlement determined in court. The judge has to take into account a number of factors set out in law and then apply discretion to come up with a settlement which is “fair” to both parties which means that the outcome can differ depending on which judge hears the case.
Despite the subjective element of judicial discretion in divorce financial settlement cases, there has been a gradual move towards courts differentiating between marital assets (those assets built up during the marriage) and non-marital assets (those assets which are derived from outside the marriage) either because they were owned by one spouse before the marriage or because one party has received them through inheritance or gift.
The starting point for the division of marital assets is 50/50. However, the judge can and will depart from this in favour of one party, principally when the needs of that party or children demand this. Traditionally, the starting point for non-marital assets has been that they should remain with the person who received them unless it is necessary for them to be brought into the settlement and divided, for instance in order to meet needs. In most cases non-marital assets do have to be divided to a lesser or greater degree.
However, any settled wisdom on asset division has recently been thrown into confusion by Sharp v Sharp [2017] EWCA Civ 408 in which the Court of Appeal stated that there are cases where the principle of equal sharing of marital assets should not necessarily be applied. It indicated that the court could depart from an equal sharing starting point particularly in cases of short, childless marriages where both spouses are working and where a significant proportion of the assets arising during the marriage were accrued by one spouse. In these circumstances, it may be reasonable for the spouse who contributed most to the assets to keep the majority.
Sharp v Sharp is an acute reminder of the uncertainty and thus risk of having a divorce financial settlement determined in court. For farming families, this is a real concern and parents are becoming increasingly reluctant to pass on the farm to their children for fear of losing the farm. The courts have little regard for the fact that a farm has been in the family for generations, so a divorce can have a devastating effect leading to farms being split up or the farming business being crippled by debt to fund a settlement. With the significant rise in farming divorces, we have seen a corresponding increase in enquiries from the older farming generation asking how they can mitigate against such a risk.
One effective option that is available to couples is the pre or post-nuptial agreement which is essentially a contract setting out the terms of the financial settlement that will apply if a couple separate and thereby giving protection in the event of divorce. In October 2010, the Supreme Court ruled in favour of wealthy Katrin Radmacher, who sought to limit the financial provision for her spouse through a pre-nuptial agreement. Her success fuelled a significant increase in demand for such agreements and farming families are no exception. Settlements under pre and post-nuptial agreements can provide for a spouse’s needs on a more limited basis as opposed to a court settlement which could result in that spouse receiving a far higher proportion of the assets regardless of who brought them into the marriage.
Of course, arranging a pre-nuptial agreement can be a delicate task. It is a difficult subject to broach and will be considered by many as clinically business-like and therefore unromantic but it is far better to have one in place just in case things do not work out quite as planned. If the parties are already married, a post-nuptial agreement can be just as effective.
For further information please contact:Alastair MacLeodSenior Associate0845 209 1696 [email protected]
Pre and post-nuptial agreements in sharp focus
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This time of year sadly often results in an increase in divorce following the end of the Christmas celebrations.Clients going through divorce proceedings will understandably want to prioritise a suitable financial settlement, or care arrangements for their children, but it is important that other legal aspects of the dissolution of the marriage or civil partnership (such as their Will and inheritance tax position) are taken into account.
Inheritance tax implications
The financial settlement made on the divorce will not normally give rise to a potential inheritance tax (IHT) liability; if the couple are still married at the time the settlement is finalised (ie no decree absolute has been made) the spouse exemption will apply. If financial provision is made after decree absolute then s11 of the Inheritance Tax Act 1984 (IHTA 1984) can normally be relied on. S11 provides that transfers are not transfers of value for IHT purposes if they are made by one party to a marriage or civil partnership for the other party’s maintenance. Importantly, marriage or civil partnership in this context includes a former marriage or civil partnership if the financial provision is made on the dissolution of the marriage or varies a provision made when the marriage was dissolved. This provision should exempt, for example, ongoing maintenance payments from one spouse to another made from the dissolution of the marriage onwards.
If neither the spouse exemption nor s 11 is available then the couple could potentially fall back on s10 IHTA 1984. S10 provides that transfers which are essentially commercial are not transfers of value for IHT purposes. This relief should apply if each of the couple has received independent, competent advice and the terms were negotiated between them. Alternatively, if the financial provision is made pursuant to a court order it is understood that HMRC accepts that this does not involve a reduction of the paying partner’s estate and thus IHT is not in issue.
Loss of spouse exemption and related reliefs
Following the decree absolute the spouse exemption is no longer available and clients should be reminded that there is a potential immediate IHT charge applying on their death and there will no longer be a deferral of any liability to the second death. Although the unused nil rate band of a previously deceased spouse can be transferred to his or her widow or widower, this is not possible for a divorced spouse. Similarly any unused residence nil rate band cannot be transferred. Although each of the former spouses can now use their own nil rate band on their respective deaths, it is possible that there will be an increase in the overall IHT liability paid by the inheriting children. The amount of this increase will depend on the time between the two deaths and the amount the nil rate band increases in the interim.
Divorce: your client’s Will and their inheritance tax bill
For example:
Sarah and John are married with two children. They have a joint estate of £3 million. John dies in 2017 leaving his entire estate to Sarah. Sarah dies in 2025 when the IHT nil rate band is £375,000. Her executors are able to claim Sarah’s nil rate band and John’s transferable nil rate band amounting in total to £750,000 with a total IHT bill of £900,000. If the couple had divorced in 2016, and John had left his assets to the children on his death using the IHT nil rate band then in force of £325,000, the total reliefs claimed by the former couple would be £700,000 and the tax bill £20,000 more. This cannot be mitigated (short of the couple not getting a divorce) but it needs to be borne in mind that previously calculated liabilities may now be higher.
Wills
Divorce will affect your client’s Will, with any gift made to the former spouse lapsing unless there is a contrary intention shown in the Will. Any appointment of the former spouse as an executor or attorney will also lapse. The Will itself will not, however, be revoked. Wills and lasting powers of attorney should be reviewed and amended appropriately.
If your client is paying ongoing maintenance to children after the divorce, and does not intend to benefit them in their Will (perhaps their estate is to pass to a new partner), then your client needs to be aware that their children may have a potential claim against the estate as a dependent for whom reasonable financial provision has not been made. Your client might like to consider making provision for the children from assets not passing under the Will, such as life insurance written in trust for them.
Re-marriage
Clients need to be aware that if they re-marry any existing Will will be revoked unless it was made in contemplation of marriage to the new partner. The new Will will have to balance the interests of the new partner with those of the children from the client’s first marriage. It is possible that setting up a trust in the Will for the benefit of the new partner, but protecting the children’s ultimate entitlement, might be the best way forward.
For further information please contact:Erica Burt-MoorePartner0845 209 1748 [email protected]
Rosie Glover, Paralegal
0345 209 1751 | [email protected]
Rosie has worked as a paralegal handling Wills and probate matters for more than three years; she has also worked at the Office of the Public Guardian.
Her areas of specialism are Wills and lasting powers of attorney. Rosie has also had recent experience of estate administration, trust law and court of protection work.
Rosie has recently worked on the administration of a large estate which included book royalties and assisted with a court of protection gift application, which required obtaining authorisation from the court for a Deputy to pay off a proportion of a mortgage using P’s funds.
Rosie has dealt with many estates where there have been no family members, making it necessary for her to be involved with registering the deaths and making funeral arrangements.
Rosie enjoys meeting clients and building good relationships with them. She frequently visits clients at their homes, in hospital, in care or end of life facilities so that she can take instructions regarding their Wills (including death bed Wills) and lasting powers of attorney.
Rumina Khatun, Paralegal
0345 209 1647 | [email protected]
Rumina joined Clarke Willmott to start her legal career in April 2017. She is involved in the entire range of private client work. Rumina has recently dealt with an international intestacy which involved locating multiple
beneficiaries worldwide.
If you would like more information about our talented Birmingham Private Capital team please do contact them on their contact numbers shown above.
05 Wealth, Health and Inheritance Briefing January 2018
Clarke Willmott is a national firm with seven offices and is proud to have an office located in the heart of the UK’s second city. Our Private Capital team in Birmingham is headed by partner Erica Burt-Moore and includes three other specialists.
Erica Burt-Moore, Partner
0345 209 1748 | [email protected]
Erica recently joined Clarke Willmott, having previously been a partner in a firm in Lichfield. She specialises in tax and estate planning, trusts, Wills, powers of attorney and probate.
Erica says that concerns about paying inheritance tax and protecting assets are common among her clients and she feels that the most important action those that are worried about these matters can take is to seek advice from professionally qualified advisers.
Erica enjoys being able to give worried clients reassurance and peace of mind through the provision of sound advice and feels that she is able to empathise with clients’ concerns and explain the law to them in a way that they can understand.
Erica is a member of the Society of Trust and Estate Practitioners and of Solicitors for the Elderly.
Outside of work, Erica is a keen runner and enjoys spending time with her young daughter.
Erica is supported by:
Anne Gillespie, Chartered Legal Executive
0345 209 1124 | [email protected]
Anne is a chartered legal executive specialising in the preparation of Wills, Court of Protection work (including registration of enduring powers of attorney, the preparation and registration of lasting powers of
attorney, and deputyship applications) and the administration of estates.
Anne’s expertise includes working with individual clients, corporations and relevant external bodies and organisations associated with the various practice areas with which she is involved.
Focus on: Our Birmingham Private Capital team
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clarkewillmott.com Great service... Great people...Clarke Willmott LLP is a limited liability partnership registered in England and Wales with registration number OC344818. It is authorised and regulated by the Solicitors Regulation Authority (SRA number 510689), whose rules can be found at http://www.sra.org.uk/handbook/. Its registered office is 138 Edmund Street, Birmingham, West Midlands, B3 2ES. Any reference to a ‘partner’ is to a member of Clarke Willmott LLP or an employee or consultant who is a lawyer with equivalent standing and qualifications and is not a reference to a partner in a partnership. The articles in this briefing are not intended to be definitive statements of the law but instead provide general guidance.