Inheritance tax

The Chancellor’s Autumn Statement

The Chancellor George Osborne has today given his Autumn Statement the government’s commitment to addressing its finances should be welcomed by the financial markets.

Below is a summary of the key announcements made today.

Economy and Government Spending

  • The Office for Budget Responsibility expects GDP to contract by 0.1% in 2012, significantly down from forecasts of 0.8% growth in March. The OBR then expects the UK economy to grow by 1.2% next year.
  • The government’s fiscal consolidation programme is to be extended by another year to 2017/2018.
  • The UK budget deficit is set to fall from 7.9% last year to 6.9% this year.
  • National debt will not begin falling until 2016-17, a year later than previously expected.
  • UK unemployment is expected to peak at 8.3%, lower than initially expected, and employment is expected to rise every year moving forward.

Taxes

  • There is to be no new tax on property (“mansion tax”).
  • 40% tax rate threshold will rise from £41,450 to £41,865 in 2014 and then £42,285 in 2015.
  • Corporation tax will be cut by another 1% in 2014, taking the rate to 21%.
  • Capital gains tax allowances will rise by 1% in 2015 to 11,100
  • Inheritance tax  allowances will rise by 1% in 2015 to £329,000
  • Tax free allowance raise is to rise by £235 to £9,440.
  • Planned 3p rise in fuel duty not just postponed, but cancelled.

Benefits and Pensions

  • Most working-age benefits to rise by 1% per year over next three years.
  • Child benefits are also to rise by 1% per year over two years from 2014.
  • Tax relief on the largest lifetime pensions reduced from £1.5m to £1.25m starting in 2014-15, the annual allowance will now be £40,000 rather than £50,000.

To discuss how this may affect your own circumstances as always please do not hesitate to contact us to schedule a meeting.

Estate Planning and second families

Hitting retirement when second families are involved can pose a lot of questions.

However, they are questions which need to be answered to ensure that financial affairs are properly addressed and dealt with appropriately.

  • Is it simply a case of identifying who brought the most into the second relationship?
  • Does this need to go to their original children or split equally with the second family?
  • How much financial responsibility do you want to take for someone else’s children?
  • How much do you want to provide for your own children?
  • How should the Will be structured?
  • How do you avoid the potential for arguments and challenges to your Will?
  • If you have a business that involves some children but not others, do you want to leave the business to the ones running it but compensate the others by bequeathing them other assets?
  • How do you protect your own capital for your children without depriving your surviving spouse of the capital to provide an income?

Life policies and Trusts are a couple of the vehicles which are available to help you get the most from your financial plan.  Cash flow modeling can help explain and demonstrate whether there is sufficient income to support two families.  Openness about your financial affairs is always preferable and help from experienced financial planners essential.

Often it is as much about the individual people involved; more diplomacy than financial but, nevertheless, seeking independent financial advice at an early stage is critical.

STOP PRESS: The inheritance tax (IHT) nil rate band will increase by 1% in 2015-16 to £329,000, the government has announced.  IHT is charged at 40% on the amount over the nil rate band.

And don’t forget that from April 2012 anyone who leaves over 10% of their estate to charity can choose to pay a reduced rate of 36%.

Why should you pay inheritance tax?

More than 3m people expect to exceed the inheritance tax threshold of £325,000, but 74 per cent have not set up any means of mitigating the charge, a survey by Investec Wealth & Investment has warned.

The survey found that 37 per cent did not want to lose access to their investments, 34 per cent were put off by the cost and 30 per cent were banking on the seven-year wait before their assets escaped IHT.

A third of respondents questioned why they should have to wait seven years at all.

The poll of 1460 adults aged 35 found that as a result; 2.5m face a potential IHT bill.

Barry Anysz, directorof Investec Wealth & Investment, said: “Trusts have traditionally been used to shelter assets from IHT but many investors rule them out because they do not want to lose access to their investments.

“On average, people only consider starting to make inheritance tax plans when they are aged 67. The older you get the more important it is to have access to your investments in case circumstances rapidly change. For example, people may end up having to use assets that had been earmarked for the next generation to pay for long-term care instead and extricating these from a trust can be complex and very expensive.”

“Everybody wants access to their capital and income and not to pay inheritance tax, it is difficult without financial planning, and any IHT solution is a compromise.”

As always experienced independent fee based financial advice is essential in this complicated planning area.