I have recently been looking into issues around Long Term Care and Inheritance Tax Planning. Many people who were looking to manage their investments after retirement were primarily concerned with Inheritance Tax (IHT) planning. Now there is the growing further complication of funding sheltered accommodation and/or residential care, should it be needed.
The average cost of care is now around £25,000 per year, but for many the costs are much higher.
This leaves the dilemma for Inheritance Tax Planning – as it maybe necessary to set aside in excess of £200,000 to fund care they may not need. If this sum is liable to Inheritance Tax then £80,000 could be the tax liability payable.
In 2010-11, Inheritance Tax was more than £2.7bn and it’s believed perhaps half of this tax is paid needlessly due to a lack of appropriate planning.
Remember, on death, the assets of a UK-domiciled individual valued above £325,000 will be taxed at 40% on the excess (£650,000 for couples). Assets caught could be anything including assets held in trust, gifts, family home, other property holdings (UK and overseas), contents, payouts from insurance and other policies, non-qualifying business assets, lump sum pensions payments, cash, stocks, shares and other holdings including jewellery; and so on.
There is no panacea to Inheritance Tax or Care Fee Planning, but the starting point is that everyone with assets must make a Will.
Choosing the right strategy
Assuming that plans chosen are affordable, the first consideration is risk and the definition of risk.
1. Risk of Challenge by HMRC – some scheme’s are more aggressive than others, and are more at risk of challenge by HMRC. In comparison, others are tryed and tested techniques which follow an accepted approach.
2. Investment Risk – some investments are cash based and are not expected to keep up with inflation, so eroding future buying power; some investments are portfolios and so the capital value is at risk to market movements, and so maybe worth less in the future
3. Loss of direct ownership and control – some schemes involve trusts and so once assets have been assigned into trust , the assets become owned by the trust and administered by the trustees
4. Loss of control of capital and access to liquidity – some schemes, once implemented the asset cannot revert to the original owner
The Scheme Itself
1. Avoid schemes which have obvious failings. For example do not do the following :-
- take out a loan against your home (as a mortgage or Equity Release/Home Reversion Schemes) and invest this into a suitable Inheritance Tax Planning Product
2. Exemptions. These are immediately free of Inheritance Tax and are detailed allowable exclusions to Inheritance Tax.
Examples are :-
- Annual Exemption (you can give away gifts worth up to £3,000 in total in each tax year and can carry forward any unused part of the £3,000 exemption to the following year for one year only)
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Wedding gifts/civil partnership ceremony gifts
- parents can each give cash or gifts worth £5,000
- grandparents and great grandparents can each give cash or gifts worth £2,50
- anyone else can give cash or gifts worth £1,000
- Small Gifts (you can make small gifts up to the value of £250 to as many individuals as you like in any one tax year)
You also can’t use your small gifts allowance together with any other exemption when giving to the same person.
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Regular gifts or payments that are part of your normal expenditure
3. Gifts and potentially exempt transfers.
These are simple ways of passing wealth on free of Inheritance Tax, but it must be an absolute gift absolving any future rights to this money. The Seven Year Rule applies and is subject to Taper Relief, if applicable.
It’s common practice to set-up a seven-year term life assurance policy in trust to cover the associated Inheritance Tax liability, especially on larger gifts to mitigate the risk of the tax liability, if you were not to survive the seven years.
The above approaches require losing ownership of associated wealth. They should be used, assuming you know the money will not be needed in later life.
4. Use of Tax Reliefs. Agricultural Property Relief and Business Property Relief attracts 100% Relief to Inheritance Tax after owning the qualifying asset for two complete years. These assets are typically less liquid and carry potentially additional risks, which need to be considered.
5. Use of Trusts
Trusts can be highly complex and require professional advice. There are many options and legislation has targeted this area in recent years.
Loan Trusts allow the original investment ownership to be retained, while the beneficiary receives capital growth IHT free. There are limitations tote effectiveness of the solving of Inheritance Tax through these schemes due to the longevity of removing assets from the chargeable estate.
Normally, the donor relinquished ownership, although some trusts do allow a change of beneficiary and discounted gift trusts allow the donor to receive income.
Alternative Investment Market (AIM) shares allow retention of ownership, but few regularly pay income dividends, so most people invest for capital growth.
These are classed as higher risk as the value of many AIM shares are volatile and can fall considerably in a market downturn, and liquidity may be an issue.
SUMMARY
These are complex issues and there are a raft of solutions with many variations. Each circumstance must be reviewed on its own merits to select the appropriate method(s) to resolve these issues.
Inheritance Tax Planning and Long Term Care Funding can be resolved on a combined approach but every circumstance will be unique because of personal circumstances, views and goals.
I would always recommend professional advice is taken.
Any questions, contact me welshmoneywiz@virginmedia.com
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