Holistic Inheritance Tax Planning Wealth Protection Holistic Inheritance Tax Planning

Agenda and Learning Objectives Residual estate liability Potentially taxable gifts Temporary liability Residence Nil-Rand Band (RNRB) By the end of this session, you will understand: How to calculate the potential tax on gifts made within 7 years of death, and the solutions available. The impact of the value of a gift made within 7 years of death falling back within the estate, and how to protect against it. How to calculate - and provide ongoing management of - the residual IHT liability on an estate.

£ Inheritance Tax (IHT) 6 months IHT payment is due no later than 6 months after the month of death1 £4.7 billion The amount of IHT receipts in 2015-162 The future IHT receipts are set to rise to £5.7 billion by 20223 Source: www.gov.uk/inheritance-tax/overview Source: Office for Budget Responsibility Economic & Fiscal Outlook – Nov 2016

When is IHT payable? IHT levied if client dies with estate > £325,000 / within 7 years of making a gift. Selected gift exemptions Husband / wife / civil partner (if both UK-domiciled). Annual exemption - £3,000 total. Wedding - £5,000 (child) / £2,500 (grandchild) / £1,000 (anyone else). Maintenance – e.g. ex-husband / wife / civil partner. ‘Normal expenditure out of income’ Christmas, birthday and anniversary presents. Life insurance policy premiums. Regular payments into a savings account. http://www.legislation.gov.uk/ukpga/1984/51/section/21

Nil-Rate Band from April 2017 From 6 April 2017, main-residence NRB (‘Family Home Allowance’) added to existing NRB: Estates > £2m lose some / all of the allowance - tapered by £1 per £2 over threshold. Tax Year Single Person Married / Civil Couple NRB FHA Total 2017-18 £325,000 £100,000 £425,000 £650,000 £200,000 £850,000 2018-19 £125,000 £450,000 £250,000 £900,000 2019-20 £150,000 £475,000 £300,000 £950,000 2020-21 £175,000 £500,000 £350,000 £1m We will ignore the effect of the RNRB for purposes of case studies / calculations in this presentation. Don’t ignore IHT liability until 2021 - you don’t know when your clients will die. Effect a whole of life insurance policy for current liability, and reduce it each year.

1. Residual Estate Liability = Value of estate, less full NRB, x 40%. e.g. estate = £1m, NRB = £325,000, IHT Liability = £270,000 (£675,000 x 40%). Solution is whole of life (WOL) insurance - JLSD for married couples. This will generally be the starting point for IHT planning. As any gifts are made (and protected), WOL sum assured can be reduced. JLSD for married couples as no IHT liability on transfers between spouses. For JLSD - if one life is medically uninsurable, we can consider underwriting the policy solely on the other life.

Audience Question With respect to Potentially Exempt Transfers (PETs), what does taper relief reduce? a) The rate of tax on failed PETs b) The value of the PET c) The value of the residual estate Answer = a

2. Potentially Exempt Transfers (PETs) A gift not otherwise exempt is known as a Potentially Exempt Transfer (PET). ‘Taper relief’ reduces the rate of tax on failed PETs made 3 to 7 years before death. N.B. Taper relief reduces the rate of tax – NOT the value of the gift. Recipient of gift will have to pay IHT if: Donor gave the gift less than 7 years before they died, and They had gifted at least £325,000 in last 7 years of their life.

2. Taper Relief Years Value of Gift Taper Relief Tax Rate 0-3 100% 0% 40% 3-4 20% 32% 4-5 24% 5-6 60% 16% 6-7 80% 8%

2. Cover for Potentially Taxable PETs Solution 1 – Gift Inter Vivos policy Bespoke policy designed specifically to cover the IHT liability on failed PETs. Sum assured reduces by 20% per year from end of year 3. Initial sum assured = potentially taxable value of PET (40% of value of PET > available NRB). NOT 40% of the value of the PET itself (unless entire PET is potentially liable to IHT). e.g. £475,000 gift: £325,000 NRB available £150,000 potentially taxable Sum assured = £60,000

2. Cover for Potentially Taxable PETs Solution 2 – 5 x Level Term policies May be more cost effective solution: e.g. £475,000 gift: LTA market more competitive than GIV market £325,000 NRB available £150,000 potentially taxable £2pm discount for additional covers (i.e. £8pm) Sum assured = £60,000 £60,000 ÷ 5 = £12,000 Value of each policy = potentially taxable value of PET; x 40%; ÷ 5.

2. Cover for Potentially Taxable PETs Year / LTA Term Tax Rate Potential IHT LTA Sum Assured 3 40% £60,000 £12,000 4 32% £48,000 5 24% £36,000 6 16% £24,000 7 8%

3. Temporary IHT Liability Full value of PET is added back to estate if donor dies within 7 years, Value of a ‘failed PET’ being added back = temporary (7-year) IHT liability. Solution is 7-year LTA: value of gift > NRB remaining after gift x 40%. e.g. £400,000 estate, £100,000 gift: £300,000 net estate after gift £25,000 NRB remaining £100,000 - £25,000 = £75,000 £75,000 x 40% = £30,000 Q1 – 7 year LTA is also cheaper than equivalent amount of WOL. Can reduce any existing WOL cover. Q. Why not just Whole of Life (WOL) cover instead? A. Gift falls out of account after 7 years - LTA more appropriate. Q. Why not Joint-Life 2nd Death for married couples? A. JLSD policy won’t pay out unless both die within 7 years. Q2 – The funds are not required until death of the 2nd life, but the problem is created by death of the 1st life.

Enterprise Investment Schemes (EISs) A tax-efficient / high-risk investment vehicle. 100% IHT relief once investment held for 2 years. Until then IHT liability is 40% of investment: e.g. £200,000 investment = £80,000 liability Clock starts ticking once shares are received, NOT from date of application. Arranging an EIS can take months - at least a 3-year LTA is required. Shares can only be issued once the company is able to receive payment for them.

Business Property Relief qualifying schemes BPR available on investments in qualifying businesses: Shares in companies not listed on a stock exchange Shares in companies listed on AIM Interest in qualifying business, e.g. a partnership 100% IHT relief once investment held for 2 years. Until then IHT liability is 40% of investment: e.g. £150,000 investment = £60,000 liability Clock starts ticking straight away - 2-year LTA suffices

Inheritance Tax Planning - Summary Start by covering the ‘Residual Liability’ Current value of estate less full NRB x 40% - Whole of Life. Cover potential liability on gifts / investments as made.

Inheritance Tax Planning - Summary Gift - if value of PET + other chargeable transfers < available NRB 7-Year LTA. Reduce WOL IHT-friendly investments 2 or 3-Year LTA (investment x 40%) Reduce WOL already in place Gift - if value of PET + other chargeable transfers > available NRB 5 x LTAs / Gift Inter Vivos on potential tax (PET > NRB x 40%) AND 7-Year LTA. Reduce WOL

Product considerations Make sure the product fits client’s needs Ensure it has mid-term flexibility: Increase cover (GIOs) Reduce cover with no age-rating Split policy on divorce Add new life on marriage Independent research - CI Expert / F&TRC Look for valuable extra features: Online trusts (no paperwork) Best Doctors™ No ongoing duty of disclosure Check for common exclusions: Drug & alcohol abuse War / terrorism / civil commotion

Cover for non-UK residents We can now consider cover for non-UK residents - both British citizens (expats) resident almost anywhere in the world, and also foreign nationals resident in over 40 countries. This is subject to the policy owner: having a GBP bank account in the UK, and a financial liability in the UK (such as IHT) for which the cover is required

Examples of AIG policy features Splitting policy on divorce Joint policy can be split into two single policies Up to previous joint-sum assured New premiums are both based on original ages No further underwriting on either life Adding new life on marriage Single-life policy can be converted into joint policy No further underwriting on first life Premium for first life based on original age