Quantifying the IHT Problem...

Inheritance Tax is a fraught subject, covered by most of the national and local media, and a subject that gives people sleepless nights in their later years.  Given that, just how big is the "Inheritance Tax Problem" and why do we worry so much about it?

At present it is estimated that more than four million people in Britain are exposed to, and therefore potentially liable for Inheritance Tax (IHT).  HM Revenue & Customs have released figures suggesting that the average IHT bill is around £60,000 per estate and that IHT receipts increased by 14% in 2010/11.  When this is looked at in the context of rising inflation against a Nil Rate Band (the amount of assets you can have before IHT becomes payable) currently frozen at £325,000 until at least 2015/16, one can see that IHT will only prove to be a growing problem for the general population.

If this is the case, why are so many people reticent to do anything about their exposure to IHT.  The reasons can be many any varied, ranging from not wanting to face one's mortality though to simply not being bothered, or to quote a former Chancellor of the Exchequer "Inheritance Tax is a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue".

There are however some more serious and valid reasons which generally centre around the preception that advice is expensive, and/or complicated, or that you're unsure of what you can reasonably afford to give away, or are perhaps concerned about losing control of your assets.  It is these areas where getting proper, qualified advice is invaluable, as it certainly isn't as expensive as people perceive, and if you are getting good advice from specialists in the subject there is no reason why it should be complicated either.

Care home fees, property trusts and protecting your assets

Asset protection trusts are being heavily marketed at inflated prices as organisations cash in on the current trend for people to protect their assets and ensuring their families don’t get hit by later life care home fees.  These groups are selling the trusts on the basis that solicitors’ trust handling fees are expensive.

In fact, solicitors fees in most cases are half the £3,000 plus VAT fee charged by some organisations, who also then insist on being appointed as their trustee and demanding an annual payment of around £200 plus VAT for the privilege.  Even certain large charities that cater for the elderly have been drawn in by these organisations and are going on to recommend them to their target groups.

Another issue that can arise is that the client who is setting up the trust does not usually have the power to later remove them as a trustee because the trust document only includes the statutory provisions which give that power to the trustees themselves.  This is something that I as a trust adviser always ensure my clients have the ability to do, so they are not tied to me or my firm for life, unfortunately some out there are not that scrupulous.

As more and more people seek to protect their assets and ensure that their families do not find themselves having to pay for their care home fees, trusts are becoming the popular way through.  Unfortunately, certain organisations are charging exorbitant fees for setting up the trusts and then making sure they can collect an ongoing annual fee to be a trustee – something which is not necessary at all.

Yes, setting up trusts can be complicated because each individual has a different set of circumstances to the next, but the benefits are that they give peace of mind by making sure there is a steady income for the whole family and a protection where expensive care home fees are concerned.  If you get the right advice, then there should not be any complications.  Therefore, it is always best to go through experienced legal firms to make sure all the complex issues are covered. Your adviser must ensure that you as their client understand the implications of setting up a trust, and that you are also properly assessed to ensure they are not creating a problem for yourself later down the line.

Unfortunately, non-lawyers are not always aware of the pitfalls and even if they are don’t necessarily pass that information on to the person they are advising on setting up the trust.

At HCB we do not insist that the client appoints us as trustees so there is no annual retainer fee and we only charge for work that has to be done such as a tax return every five years and that would be around £100. And we give the power to remove and appoint trustees to the person setting up the trust.

Our service, like many other solicitors, not only means that the client is talking to a legal expert, but costs them less money and is more transparent -  the exact opposite to how the get-rich-quick salesmen are portraying the legal profession.

This is however a growing fashion – the same issues surround DIY wills and internet divorces. The client will always be better off taking proper legal advice rather than taking off-the-shelf solutions and it will often cost a lot less in the long run.  Prevention is always better than cure, so take the right advice from the right people now, rather than trying to fix the problems created by unqualified advisers at a later point.

HCB Networking hits Lichfield

Well, continuing the theme from last month in the attempt to unite the Lichfield and Sutton Coldfield business communities the HCB networking bandwagon hit Lichfield today.  Michelle Dean and I again hosted another packed event, this time at Apres on Bird Street.

There was a slight deviation from last month's inaugural event, but only insofar as the apparent absence  of any mind readers this time round.  However, there was still a great buzz about the event with all of the professions in and around Lichfield well represented, with again around 30 delegates in attendance enjoying a light hearted quiz, good food and even better company.

Having held events in both locations now, it is clear that there is a hunger for this type of professional, yet slightly relaxed forum for local businesses and professionals to get together and discuss business, or anything else for that matter.  Feedback was again excellent, and Michelle and I look forward to seeing everyone again in Sutton Coldfield next month!

Next event is back at Don Diego's in Sutton Coldfield next month on Wednesday 11th July 12pm, we'd love to see you there!

Pensioners - Tax, Trusts and (some) Free Help!

There has been a noticeable increase in the number of pensioners re-organising their financial affairs in a more beneficial way since the Government announced the freezing of tax allowances for over-65s and over-75s.

Pensioners are not only worried about their own financial positions but they are anxious not to be a burden on their families. As we know, in the name of tax system simplification, from April 6 next year the Government is scrapping the age-related income tax personal allowance so those under 64 are no longer set for a boost at 65. Those 64, or 65-plus and currently getting extra tax-free income, will see their allowance frozen at 2012-13 levels. At the moment, pensioners aged over 65 can bank a larger income from state and personal pensions, employment - without paying any tax. Those between 65 and 74 can take home £9,940; those aged 75 can take £10,090.

The problem is pensioners will have planned their future finances with the age-related income tax personal allowances, now they have to think again.

There has also been a rise in the number of pensioner couples looking at trust funds to not only protect their own assets but those of their families as well as help in paying care home fees. Setting up trusts, although complicated, can make sure there is a steady income for the whole family but can also be a benefit in paying care home fees, a major drain on resources as we get older. 

I am part of the T.O.P. team in the UK, an independent free tax advice service for older people on low incomes who cannot afford to pay for professional advice. TaxHelp for Older People is a service originally provided by the Low Incomes Tax Reform Group but is now provided by Tax Volunteers, and through which pensioners with a household income less than £17,000 per year, qualify for free tax advice. I am finding that I am making an increasing number of home visits and attending more surgeries for those pensioners who meet the charity’s requirements as a result of these changes. There is no doubt that at whatever end of the economic spectrum the pensioners are, the Government’s move on tax allowances has caused a great deal of anxiety.

Pensioners are turning to professional advice and at HCB we can offer both legal and tax specialist help, avoiding the inconvenience of having to use two firms to get the service required.

Tax Credits Hell

You've all seen or heard the recent television or radio adverts encouraging you to renew your tax credits application before the end of July.  What you won't have heard about is the growing number of taxpayers who are being pursued by HMRC for overpayment of tax credits, in most cases running into thousands of pounds and usually as a result of an error by HMRC.

One particular mistake that can occur, and can greatly accelerate overpayment, relates to jobseekers allowance.  This is extremely relevant at present given the current econimic climate, and the high unemployment rate.  As you may, or may not, be aware there are two type of jobseekers allowance, the first is "contributions" based and is usually a low fixed amount, the other is "income" based or "means tested".  Unfortunately, HMRC's tax credits system doesn't differentiate between the two, and it is almost never explained by them.  So, very often if you have told HMRC that you are in receipt of jobseekers allowance you are treated as being in receipt of the "income" based benefit.  This basically overides the system and applies the maximum amount of tax credits to your claim.

I would like to say that this is the only area where errors can be made, but unfortunately that is not the case.  Tax credits as a system has always been flawed, and shows no signs of improving in the near future.  This gives rise to an issue that will not then surface for two to three years until HMRC figure out an overpayment has been made, following which they will usually pursue the claimant for repayment.  Therefore, should you find yourself in this position, the first thing you must do is dispute the overpayment and contact HMRC to find out the exact facts of your case.  These are not supplied upfront, and you will not be able to dispute the overpayment without them, so make sure you get all the relevant dates and figures before lodging your dispute.

Finally, its worth noting that HMRC are only keeping file notes on tax credits claims for three years, which is somewhat ironic given that the rest of us have to keep our tax records for at least six! 

Unity boost for Sutton and Lichfield businesses

An initiative uniting professional business communities and boosting entrepreneurship in Lichfield and Sutton Coldfield has been launched by a legal firm which has offices in both centres.

The HCB Solicitors group, which recently opened offices in Sutton and 12 months ago took over long-established Lichfield-based law practice Sharrotts, is aiming to bring professionals closer together to strengthen business in the two communities.

The project was kicked off with a networking event at Don Diego’s Spanish tapas restaurant in Sutton, attended by over 30 representatives from the legal, accounting, financial services and banking sectors.

Don Diego’s is a new business in Sutton and photographs were taken by David Boynton, who runs db Photographic, a fledgling company in the Walsall area, while local corporate entertainer Paul Brook, who performs a psychological/mind reading act, entertained the guests.

Steve Holden, tax director of the HCB Solicitors group, said: “From the reaction of the guests it was obvious this was a much-needed initiative. Bringing the professions together will strengthen the business communities and that’s a major benefit for companies in both centres.

“We see this as the first of a number of get-togethers at improving business relationships”.

Michelle Dean, a HCB director who helped organise the event, said: “The feedback was very encouraging. We were told in no uncertain terms by everyone who attended that they not only found it useful from a getting-to-know you perspective, but that getting all the professions to meet in informal surroundings was a positive move towards business unity.”

The next one is on Thursday June 14 at Apres in Lichfield and they will take place each month after that alternating between the two locations.

Happy New Tax Year

The 6th of April is here again, and as we look forward to a new tax year I thought I'd share a collection of quotes from famous names on the subject of tax.

Rob Knauerhase
Isn't it appropriate that the month of the tax begins with April Fool's Day and ends with cries of 'May Day!'?

Albert Einstein
[on filing tax returns] This is too difficult for a mathematician. It takes a philosopher.

Winston Churchill
There is no such thing as a good tax.

John Maynard Keynes

The avoidance of taxes is the only intellectual pursuit that carries any reward.

Plato 
When there is an income tax, the just man will pay more and the unjust less on the same amount of income.

Albert Einstein
The hardest thing in the world to understand is the income tax.

Winston Churchill
We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.

Calvin Coolidge
Collecting more taxes than is absolutely necessary is legalized robbery.

  

Will Rogers

The difference between death and taxes is death doesn't get worse every time Congress meets.

Roger Jones
I guess I think of lotteries as a tax on the mathematically challenged.

Mark Twain
The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin.

Hope the New Tax Year brings you success and prosperity in 2012/13!

Year end tax planning 2011/12

The end of the tax year is looming large, so if you want to make the most of your annual tax-free allowances, you'd better get a move on.  Sorting out your finances now is essential, especially as there are some important changes coming into effect at the start of the new tax year.

Personal Allowance

Everyone in the UK is entitled to earn a certain amount of income each year before paying tax, this is the personal allowance. This tax year, we each have a personal allowance of £7,475, with higher allowances available to those aged 65 and above.  This increases to £8,105 next year.

If you are married and one partner is not working, it makes sense to transfer savings accounts to them, so that you pay less tax as a couple. You cannot carry your personal allowance forward to the next year if it is unused.

Individual Savings Account (ISA) allowance

ISAs allow you to save money free of income tax and capital gains tax. This tax year, you are allowed to put £5,100into a cash ISA, and the same amount into a stocks and shares ISA, or you can put the whole £10,200 allowance into stocks and shares.

From April, you will be able to invest £5,340 in a cash ISA, and £5,340 in a stocks and shares ISA. Alternatively, you can invest your whole £10,680 ISA allowance in stocks and shares. Any allowance not used by the April 5 deadline will be lost forever.

Top up your pension

For every £80 a basic-rate taxpayer put into their pension this tax year, the government will top it up by £20, so that the total contribution to your pension is £100. This is because you get basic rate tax relief on pensions at 20 %. Higher rate earners do even better because they can get up to 40 % tax relief, so £100 paid into a pension will only cost £60, and top rate taxpayers receive 50% on their contributions - that is £1 from the government for every £1they save.

From April, however, the maximum amount that savers can put into pensions and claim tax relief on will be reduced from £255,000 to £50,000. That means if you want to make a big lump sum payment into your your pension you'd do well to do so before the end of this tax year.

Inheritance Tax Planning

If you haven't done anything about inheritance tax planning, you should do so now. Currently, inheritance tax (IHT) is charged at 40% on anything you leave over £325,000 when you die.

Most importantly, you should write a will, making it clear who you want to leave your money and possessions to when you die. You may then want to try and minimise any potential inheritance tax bill by giving regular small gifts away.

You can give away a lump sum of up to £3,000 in each tax year without paying inheritance tax - known as your 'annual exemption', or £6,000 this year if you haven't used last year's allowance.

You can also give away surplus income totally free of inheritance tax, provided you can demonstrate that it is not affecting your standard of living.  The end of a tax year is always a good time to assess this position.

Reduce Capital Gains Tax

Capital Gains Tax is a charge that arises from the sale of assets, such as shares or buy-to-let properties, charged at18% for lower and 28% for higher-rate tax payers. Every individual has an annual capital gains tax free allowance, which stands at £10,100 for the current 2010/11 tax year.  The limit applies to each individual, so if you are married or in a civil partnership you each have an annual exemption.

Get advice

Tax planning can be complicated, so seek professional independent advice if you aren't sure of how to proceed.

Take AIM for good tax advice...

No, I'm not talking about Alternative Investment Markets (although they can form part of tax planning).  Rather I'm looking at the three key components that should be involved in any tax advice that you receive, which are the three steps of the process to make sure that good advice actually works for you, rather than just being good advice.  It was Oscar Wilde who said "I always pass on good advice, it is rarely of use to ones self.".

A) Of course, the first step on the path to mitigating your exposure to any form of taxation is advice, and its usually where the process for many clients starts, and unfortunately ends.  Good advice should look at your tax affairs in the round, and not just the tax problem you thought you had when you walked through the door.  Almost all of the direct taxes (income, capital gains, inheritance) and some of the indirect taxes (VAT, stamp duty) interact at some level on any transaction, and you ognore the other areas of tax at your peril.  If your accountant or tax adviser isn't doing this, get a new one.  Also, rather than focussing on the problems, is the advice you're getting offering solutions rather than just telling you what the bill is?

I) Okay, if you got to this step we've established that you're getting the right advice.  I stand for implementation.  Normally, after seeking out the tax advice, part of the solution you have is to put in place some sort of structure, be this a will, a trust, a company or another legal entity.  So, what happens next, your tax adviser sends you off to your lawyer, or recommends one to you.  You need to make sure that your tax adviser and lawyer are talking to one another so that the advice is correctly interpreted and implemented by the lawyer.  Also, is your lawyer a specialist in that field?  If not, I heartily recommend you seek one out.

M) Right, we've done to most what seem like the most important parts of the process in tax advice, time to put your feet up now yes?  Wrong, the most important part of dealing with a tax issue is M for management.  If the advice you receive isn't reviewed from time to time, it might no longer work, or have been rendered irrelevant by retrospective legislation.  If you don't fulfil the legal requirements of say a trust, it can be shown to be a sham by the tax authorities (or worse by the divorce courts).  Its important to ensure that you keep getting the right advice, as tax advice isn't a band-aid one time fix, its a constantly evolving process that involves your accountant, tax adviser, lawyer and financial adviser.

Even if all of these steps are in place, you can still hit rocky shores if your advisers don't talk to each other, or simply don't understand what one another are trying to acheive.  Where possible try and include all parties in the initial advice, or better yet look for someone who can fulfil the role within one firm (we are out there!).  So in order to ensure that your aims and desires are followed through, make sure you take AIM at your tax affairs and act on the advice you receive!

5 top tips to help you save Inheritance Tax

1. Utilise your tax free gifts reliefs
Lifetime giving can over time reduce your estate substantially, however there are limits to what you can give and to whom tax-free. The individual allowance is £3,000, and if you have not used this in the preceeding year, you can claim that too, so potentially £6,000. This is per person, so a married couple/civil partners could gift up to £12,000 tax free in one year. There are some other tax-free gifts such as wedding gifts, small annual gifts of up to £250 per recipient, and last but not least gifts out of income that are normal expenditure that do not affect your standard of living. This last one has the potential to stop your estate growing, by giving away, rather than saving surplus income.

2. Reduce your estate by making potentially exempt transfers

Potentially exempt transfers (PETs) are gifts in excess of the tax free limits set out above, but these larger lifetime gifts may escape IHT if you live for seven years after making them. If you do not survive the seven year period, they are added back into your estate if they 'fail'. So your beneficiaries are no worse off than they would have been had you not made the PET.

3. Consider using trusts
Sometimes giving away larger assets can be a problem, because there may be substantial capital gains involved in making such a gift. One way to get around this is to settle the assets you wish to make a gift of into a family trust. Provided that neither you, nor your spouse/civil partner can benefit from that trust, you can defer any capital gains arising from the gift. The same IHT savings can then be made without incurring a CGT bill. Two words of caution though, first make sure you get proper advice on how to set a trust up, and two, if you put more than £325,000 into a trust the excess will suffer IHT at 20%. Plan carefully though and they're still a useful tool for minimising IHT.

4. Make gifts to charity
Gifts to charity are exempt from IHT, and so you can use them to reduce the size of your taxable estate in much the same way as the tax free reliefs mentioned above. Also, from April 2012, charitable bequests made through your Will can also reduce the rate of IHT your heirs have to pay. If you give at least 10% of your estate to charity, the rate of tax levied on the rest will be reduced by 10%, from 40% to 36%. This does not have to be a recognised charity, indeed if your estate is sufficient you may even wish to leave a charitable trust as a legacy that can then contribute to local charitable purposes.

5. Finally, claim a partner's unused IHT allowance
It is possible now for the executors of married couples and civil partners to claim any IHT allowance that their deceased partner has not used, currently set at £325,000 per person. If the first partner has made no use of their nil-rate band (by leaving everything to their spouse, for example), the second partner effectively has a double allowance of £650,000. If the first partner used part of their allowance, the unused proportion is carried over to the second - and applied at the rate in force on second death.