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Planning process
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Big picture – Estate Inventory
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Planning framework
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Planning environment
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General principles of tax planning
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Planning tools
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Tax-efficient will planning matrix
1
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Client’s objectives & instructions – getting the lay client involved
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Fact-finding – Estate Planning Inventory
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CLT PET & NRB analysis
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Preliminary IHT calculations
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IHT exemptions & reliefs analysis
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Assembly of records & number crunching
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Isolate the problem
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Identify the planning constraints
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Develop a solution
2
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Ensuring continued welfare and lifestyle of S
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Ensuring S can continue to live in the matrimonial home
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Capital preservation for children from earlier marriage
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Business / Farm succession planning
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Asset protection
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Flexibility
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Professional wealth management
3
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Beneficiary - exempt or non-exempt
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Assets – excluded property or attract relief e.g. APR/BPR
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Property and interest gifted to the beneficiary
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Trustees powers
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Tax treatment corresponding with form of trust
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Boundaries of lawful tax planning
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Potential tax traps
4
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Stability of APR/BPR and change in rates?
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NAO Report
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Change in approach by the courts
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HMRC’s armory in combating tax avoidance
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Ramsay principle
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GAAR
5
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To suggest that successful tax avoidance = structuring to avoid a
tax which Parliament intended to impose is a contradiction in
terms – Lord Hoffmann
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Tax avoidance & tax mitigation
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Tax planning - making sensible use of the available exemptions
and reliefs provided for in the tax legislation
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Fishers Executors v CIR [1926] & the GAAR
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The rule of law - There is nothing in the GAAR to prevent ingenious
tax planning per se
6
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Automatic percentage reduction in value of property transferred
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Agricultural value
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Agricultural property
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Location
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Occupation condition
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Ownership condition
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Farmhouses
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Rates
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Problem areas
7
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Reduction in ‘net value’ of ‘relevant business property’ transferred
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Conditions
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Business & exclusions
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Business consisting wholly or mainly of making or holding investments
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Relevant business property & rates
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Excluded assets
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Ownership
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Net value
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Deduction of debts
8
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Special rules apply to the valuation of specific and residuary gifts where
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part of T’s estate is exempt &
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includes property attracting APR/BPR
Where T’s will establishes a NRBDT and he leaves residue to S if he
owned property attracting 100% APR/BPR then his will operates so that
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part of the benefit of the APR/BPR accrues to the NRBDT and
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the remainder of the relief is attributed to property passing
spouse exempt to S
This results in APR/BPR being wasted
9
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Specific gift made to a chargeable beneficiary
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Re-cycling
10
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Where T dies leaving part of his NRB unused then on S’s death
her PR’s can make a claim under s.8A for her NRB to be
increased by the proportion of T’s unused NRB
Therefore if T leaves everything to S or to a life interest trust
created by his will for S then on her death S’s PR’s can take
advantage of two NRB’s
s.8A sets out various formulae for calculating T’s unused NRB
and the increased NRB available to S’s PR’s on her death
S can take portions of an unused NRB inherited from any number
of spouses or civil partners
However S’s death estate cannot benefit by more than the full
value of one additional NRB
11
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Freezing the value of an asset likely to grow by a greater
percentage than the percentage increase in the NRB between the
death of T and S
Prevention of T’s share of the equitable interest in the family
home being collapsed into residue
Ring-fencing of capital value for the benefit of children of an
earlier marriage
NRB maximisation by
avoiding S’s NRB being wasted where T has one NRB and S
already has two and
sheltering of more than 2 NRB’s
Taxation
12
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A discretionary trust can be constituted by
1.
appropriating assets to that value to the trust (including T’s
share of the equitable interest in the matrimonial home (his
‘share’) or
2.
with a debt or charge instead
Three options where T’s share is worth less than the NRA
1.
the balance of the NRA legacy can be waived
2.
further assets can be appropriated
3.
the money owed to the trust fund can be left outstanding
as a debt from S (i.e. the ‘debt’ or ‘charge’ scheme)
13
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The NRA legacy is satisfied by a debt owed to the NRA trustees by either:
1.
S (where residue passes outright to her) or
2.
the trustees of the residuary trust fund (where residue has been left
on trust for S)
On T’s death S promises to pay the NRA personally to the trustees by
giving them an IOU, and in return receives the whole of T’s
unencumbered residuary estate but incurs a debt that is deductible
against her chargeable estate for IHT on death
To be deductible from S’s estate on her death the debt must
1.
be incurred for full consideration in money or money’s worth &
2.
not infringe the artificial debt rules contained in s.103 FA 1986
14
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The NRBDT is set up by means of a non-recourse charge created by T’s
executors over assets in his estate
The terms provide that neither the executors nor any beneficiary to whom
the charged property is assented is personally liable to make repayment
The executors:
1.
impose an equitable charge over either
(i)
the property; or
(ii)
T’s equitable interest in the property (i.e. so S does not incur a
debt); and
2.
transfer the charge to the NRA trustees in satisfaction of the NRA
legacy
The assets transferred (by assent) to S are reduced in value by the charge on
T’s property
15
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s.144 allows a distribution to be made under s.142(1) within 2
years of death without any charge to IHT out of assets settled on
discretionary trusts by T’s will
Therefore where T
1. gives his estate (or some part of it) to his trustees to hold on
discretionary trusts
2. under his will conferred wide powers of appointment on
trustees exercisable in favour of a specified class of
beneficiaries (leaving it to trustees to distribute his estate or
declare further trusts of trust property)
3. trustees exercise the power within 2 years of T’s death and
4. no-one obtained a life interest within that time
then tax will be chargeable as if the gifts/trusts were made by T
on his death and the appointment will not be subject to the RPR
16
As a general rule all trusts set up on or after 22 March 2006 are
subject to the ‘relevant property regime’ with 4 exceptions (the
‘Special Trusts’)

a trust created on death for a disabled beneficiary
(‘DPT’) (s.89(4))

a trust for a bereaved minor (‘BMT’)

a trust for the benefit of a minor who becomes absolutely
entitled to capital between the ages of 18 and 25 (‘18-25
Trust’)

a trust created on death with an immediate interest in
possession (life interest), known as an immediate postdeath interest trust (‘IPDI’)
17


4 types of interest qualify
1.
a deemed life interest in a trust for a disabled person under s.89(2)
2.
a deemed life interest in a ‘self-settlement’ (i.e. trust) created by a potentially disabled
person under s.89A
3.
an actual life interest in settled property (other than an interest within 1 or 2 above) to
which a disabled person has become entitled on or after 22nd March 2006
4.
an actual life interest in a ‘self-settled’ trust (other than an interest within 1 or 2
above) into which settled property was transferred on or after 22nd March 2006 which
(i)
meets the requirements of potential disability set out in
s.89A(1)(b) &
(ii)
secures that if the capital is applied for the benefit of any
beneficiary it is applied only for the benefit of the settlor
Tax treatment
18

To qualify the trust must
conditions set out in s.71A(3)

No IHT is payable
satisfy
the
1. during the bereaved minor’s infancy
2. on becoming absolutely entitled to capital
on or before 18 or
3. where the minor dies before 18
19

Trust must satisfy the conditions in s.71D & no IHT is payable
1.
2.
3.

If trust continues between 18 & 25 will be an exit charge at rate of 0.6% for each year
(up to a maximum of 4.2%) where
1.
2.

until beneficiary becomes 18
where beneficiary becomes absolutely entitled to capital before 18 or
if power of advancement exercised before beneficiary becomes 18 to defer
capital entitlement beyond 25 however trust property becomes subject to RPR
from date of exercise of power
beneficiary is not absolutely entitled to capital until 25 or
between 18 & 25 capital is advanced to him (or for his benefit) which includes
deferral of capital entitlement beyond 25
When beneficiary absolutely entitled at 25 or capital is advanced to him between 18 & 25
will be an exit charge at 0.6% for each year after 18 resulting in maximum exit charge of
4.2% if capital vests at 25
20
An IPDI exists & will be taxed under s.49A where 3
conditions satisfied

the trust was effected by will or under the law
relating to intestacy

the life tenant (e.g. S) became beneficially entitled to
the life interest on T’s death and

the trust must not be for bereaved minors and the
interest is not that of a disabled person which
requirement must have been satisfied at all times
since S became beneficially entitled to the life interest
s.49A
21
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
To S (who is an exempt beneficiary) either
outright (by making an absolute gift) or
on a life interest trust (an IPDI)
To children and grandchildren of any age (to skip a generation) of
chargeable property outright up to the amount of T’s unused
NRB which will then become depleted
assets qualifying for business /agricultural property relief &
excluded property
To children who are minors on
a bereaved minor’s trusts (a ‘BMT’)
an 18-25 trust
an immediate post-death interest trust (an ‘IPDI’) or
a discretionary trust
22
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
When creation of a life interest is coupled with wide ‘overriding
powers of appointment’ trustees can appoint property comprised in
trust on to new trusts, and in favour of different (and additional)
beneficiaries
Inclusion confers maximum flexibility on trustees over
1.
2.
3.
4.
disposition of trust property
payment of income
advancement of capital
creation (or ‘appointment’) of new trusts for benefit of
beneficiaries
23

If trustees exercise their power to terminate an IPDI
during S’s lifetime in favour of an individual
absolutely that would cause S to make a PET

For GWR surrender / termination of an IPDI is treated
as if life tenant had made a gift FA 1986 s.102ZA

Therefore if S may benefit from the assets previously
subject to the IP the GWR rules apply

A PET will be made should S cease to have a
reservation of benefit on the date the reservation was
released
24

36% rate of IHT

Charitable giving condition

Donated amount

Baseline amount

‘Donated amount’ must be at least 10% of the
‘baseline amount’

The election
25