UK: No Time Like The Present

"In this world nothing can be said to be certain except death and taxes", as Benjamin Franklin said. Despite the certainty, few of us plan our lives for these events. The annual tax return still comes as an unpleasant surprise to many and few people trouble to put their affairs in order before death.

Despite advice from solicitors and other professional advisors many people do not review their Wills to keep pace with changes in circumstances; many do not make Wills at all. Obviously writing a Will is the only certain way of ensuring that the people you care for are properly provided for after death and of ensuring that your estate is managed in as tax efficient way as possible. However it is still possible for beneficiaries to vary the terms of a Will, after the death of a testator (or the provisions which apply on intestacy) to produce a more tax efficient position. This can be done by means of a Deed of Variation. If you find yourself as a beneficiary disadvantaged by the tax consequences of a Will, your solicitor may be able to help.

Solicitors can advise on a number of tax saving measures during lifetime and after death. Nil rate band trusts have long been a simple and effective way for married couples to save inheritance tax.

The nil rate band, currently £242,000, is the threshold beneath which inheritance tax is not paid. The nil rate band is available to both a husband and wife.

Gifts between husband and wife are free from inheritance tax. If the husband/wife gives his or her whole estate to the survivor, there would be no tax. On the subsequent death of the second spouse, the whole of his/her estate would be taxed except for £242,000 (and any gifts that there may be to charity).

Alternatively, sufficient assets, particularly cash assets are available on the first, it would be preferable if the figure up to £242,000 could be placed into a discretionary trust under which the beneficiaries would be the surviving spouse and the children and grandchildren of the couple. There will still be no inheritance tax on the first death. On the second death, the taxable estate will have been reduced by £242,000 being the amount diverted to the discretionary trust on the first death. This results in a tax saving of £96,800.

If not a certainty, it is a strong probability that increasing numbers of us will grow old but again few people choose to contemplate this prospect in advance. The population is getting older; people live longer and the state pension is increasingly inadequate to meet their needs. Private pension provision is becoming more and more of a priority. There are a number of ways to plan for a pension.

Tax relief is available on pension. Planning for a pension is therefore something which can be built into a tax efficient method saving. If you are already in your employers pension scheme, it is currently possible to make "additional voluntary contributions" (AVC’s) to top-up your current provision. You will have to speak to your pensions or financial advisor. However subject to the earnings cap where available, contributions to AVC’s can be made so long as the total of the contribution made by you to your own pension scheme and to the AVCs do not exceed 15% of your salary.

If you are not in an employer’s pension scheme but make your own arrangements, then to the extent you can afford it, it is tax efficient to make the maximum contributions that you are allowed to, under the Inland Revenue Regulations. Not only are your own contributions subject to tax relief (subject to the cap) but the sums in the pension fund are not subject to tax. The disadvantage of investing in pensions is the lack of flexibility in that broadly the benefit can only be taken as pension in due course. However, the avenues open to you are much more flexible than they used to be and we can help advise you on this.

Another area of increasing concern to elderly clients is the cost to them or their relatives of residential care. At present the state is entitled to take account of an individual’s own savings over £16,000 to pay for the cost of nursing care. The discretionary trust is available as a means of providing against nursing home fees. Assets placed in the trust would play a significant part in calculating a contribution to nursing home fees as would be the case if the assets were held by an individual. We can advise you about planning both for pensions and residential care.

It is never too soon to contemplate the future and to make provision for old age, death and taxes. A visit to a solicitor can help to ensure that at least your paperwork is in order, a Will has been drawn, inheritance tax accounted for and minimised, and pension provisions put in place. It cannot of course make any of these prospects more palatable!