It’s never too late for estate planning
March 24th, 2014
In previous articles we have focused on the importance of lifetime inheritance tax planning and making a will to ensure your estate is distributed according to your wishes, however it is also worth pointing out that even after death there are still potential tax planning opportunities available which should not be ignored.
Capital Gains Tax
As a general rule the value of assets you own with unrealised capital gains will benefit from an uplifted market value on death. This means that any unrealised gains are effectively ‘wiped out’ on death and there will only be a potential liability to CGT on subsequent disposal on any increase in the value of the asset from the date of death
Where, however, there are assets of significant value then there could still be a healthy appreciation in their value during the estate administration period and decisions made by the executors in respect of how the estate is distributed could have an impact on any resultant tax bill. This is because any gains realised by personal representatives whilst administering the estate are taxable at 28%, although unlike trustees they do have a full annual CGT exempt amount (currently £10,900 for 2013/14)
Consider for example an individual who dies leaving a property to their two children who are both basic rate taxpayers. The property was bought 15 years ago for £80,000 but is valued on death at £200,000. The unrealised capital gain is effectively ignored and it is the value at the date of death that is used to determine whether any capital gains tax is due on any further sale of the property.
If the personal representatives sell the property some months later for, say, £220,000 in order to distribute the proceeds to the children then the tax payable would be as follows:
Less annual exemption £10,900
Gain subject to tax £9,100
CGT at 28%` £2,548
If, however, the personal representatives had instead transferred the property to the two children and the children had then sold the property, there would be no CGT as the gain would be shared amongst each of them as follows:-
Gain £10,000 (£20,000 ÷ 2)
Less annual exemption £10,900
Gain subject to tax £0
In some circumstances a person’s will (or indeed the intestacy rules where a will has not been made) may not distribute their estate in the most tax efficient manner. Fortunately, in certain circumstances, it is possible to vary the estate distribution posthumously through a deed of variation provided (amongst other requirements) this is executed in writing, within 2 years of the date of death, and that all beneficiaries affected by the variation are party to it. If a valid variation is made, then for Inheritance tax purposes it is treated as though it had been made by the deceased (rather than the person making the variation).
This can provide some useful planning opportunities; for example assets can be redirected to a trust under which the person making the variation can still be a potential beneficiary. This means the individual can still benefit from the re-directed property without it actually forming part of their own estate for IHT purposes.
Following on from the earlier Capital Gains Tax (CGT) example it is also possible for a beneficiary to dispose of assets and make use of their annual CGT exemption and then execute a deed of variation (provided it meets the requirements) to re-direct the inheritance. This is because it is the disposition rather than specific property which is being varied.
In our earlier article we covered the use of spousal bypass trusts for pension death benefits and whilst this sort of planning should ideally be put in place whilst the member is alive, in some circumstances a bypass trust can be established posthumously.
A deed of variation cannot be used to redirect pension death benefits that have already been paid out by the scheme. However, a deed can be used to create a trust ready to receive death benefits yet to be paid by the trustees.
For example, where the members spouse has been nominated to receive death benefits the spouse could execute a deed to redirect a nominal amount of the deceased’s other assets to a trust. The spouse could then ask the trustees to pay the death benefits to the trust rather than to them personally. Provided the scheme rules give discretion to the scheme trustees to pay to another trust, payment of the death benefits within two years of the member’s death wouldn’t trigger an IHT charge and the death benefits would be kept outside the taxable estates of the member’s family.
We hope that the above article gives an idea of some of the planning that can be considered in these circumstances. However, we can only give a brief overview and therefore advice is essential before taking any action. In particular, there are potential income tax and capital gains tax issues to consider when executing a deed of variation, especially when redirecting monies into trust.
We will be happy to discuss any of the above issues in further detail so please do not hesitate to contact us if you require any advice or guidance.
The Financial Conduct Authority does not regulate taxation and trust advice
The tax treatment depends on the individual circumstances of the investor and may be subject to change in the future