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Inheritance tax and pensions

Inheritance tax (IHT) isn’t usually applied to registered pension arrangements, however there are certain situations and actions that you should be aware of to avoid a potential IHT liability.

Incidentally, funds held within the NEST pension scheme are not currently exempt from IHT.

Pension contributions

Pension contributions, once paid, are typically outside the member’s estate. However, you should be aware that when contributions are paid by the member whilst in poor health and death occurs within 2 years of making them, HMRC could treat the contributions as transfers of value and take them into account for IHT purposes. This only applies when the contributions are seen to be Pension‘substantial and unusual.’

Death benefits

There are some situations where pension death benefits would be included for IHT purposes:

  • Member’s estate is legally entitled to receive the death benefits.
  • Lifetime transfers of death benefits within two years of death.
  • Where the member has an unrestricted right to bind the trustees or administrators or had the power to direct that the death benefits be payable to a certain person or to their own estate.
  • Pension and annuity arrangements are exempt under the Inheritance Act 1984 from initial periodic and exit charges normally applied to property held inside a discretionary trust.

Annuities

Although annuities are typically not subject to IHT, there are two areas where IHT does apply to annuities:

  • Annuity payments continuing under a guarantee period and payable to the estate as of right.; the market value of the remaining payments is included in the estate.
  • If the annuity is protected and the remaining lump sum is payable to the estate, the amount is included in the estate for IHT purposes.

What should you think about?

Although your pension scheme is there to provide for your retirement, there are clearly important considerations in relation to what happens when a member dies, including the impact of IHT on your estate. We would, therefore, recommend that you seek professional advice from your financial planner to make sure the death benefits on your pension are carefully organised.

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5 Tips to Navigate the Pensions Maze

Direction imageIt is important that anyone approaching retirement takes time to get all the help they need, rather than rushing headlong into cashing in their pension, which may be a temptation for many following the new regime.

To help navigate the pensions maze here are 5 points that you might find helpful.

  • Tax needs to be considered

Withdrawals of income on top of any tax-free cash will be subject to tax at a taxpayer’s marginal rate.

Remember also that you will compromise the ability to make further contributions into a pension plan if withdrawing income beyond tax-free cash – as the Annual Allowance then reduces from £40,000 to £4,000.

Smaller pension pots work differently; and it may be possible to cash in a maximum of three pots each worth less than £10,000, without triggering the reduction in the Annual Allowance. However, you would pay tax on the money cashed in after the 25 per cent tax-free cash.

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Can your pension be used to cut your inheritance tax bill?

Current legislation allows for anyone who dies to pass over their pension cash without their heirs being liable for then handing over part of it to the taxman.

Somewhat of a lifeline to the rising number of middle-class savers whose families face being hit with an Inheritance Tax bill when they die.scissors-cutting-red-ribbon_1101-911

The Inheritance Tax levy charged is 40 per cent on estates worth more than £325,000 belonging to individuals, or £650,000 for couples; and is applied to property, investments and savings, although the introduction of the Main Residence Nil Rate Band has afforded some comfort to many.

However increased property prices mean thousands of ‘ordinary’ people are being dragged into this tax trap – initially aimed at the wealthiest.

Under newer pension freedoms, some people could escape having to pay inheritance tax for generations – because no inheritance tax is due on pensions.

Anyone inheriting pension cash from someone who dies before the age of 75 does not have to pay any tax at all.

Those who receive a pension from a loved one who passes away after the age of 75 will pay tax on money they withdraw at their normal rate of income tax.

The reforms also mean that anyone who is already taking their pension may also be able to pay £4,000 a year into a pension plan.

Those with larger estates may be able to top-up every year (provided they had not passed their individual lifetime allowance) to potentially reduce their family’s inheritance tax bill.

So, can your pension be used to cut your inheritance tax bill? Yes it can…

Pensions can be an effective tax planning tool – and have indeed become a new and valuable way of avoiding inheritance tax.

Your Chartered Financial Planner will be able to help you navigate these options if advantageous to your personal circumstances.

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Financial Advice: Independent Vs Restricted

Since the Retail Distribution Review (RDR), or in other words the new set of rules formed with the aim of introducing more transparency and fairness in the investment industry; financial advisers have to offer either ‘independent’ or ‘restricted’ advice… and it’s important to know the difference.divided-apple-1171062-639x508

It has been recently highlighted in the media that these terms aren’t very helpful to consumers, especially without much description as to what they actually mean.

Matrix Capital are completely Independent. The distinction between the two is whether recommendations are limited to certain products or product providers (restricted) or recommendations are ‘whole-of-market’ (Independent).

For a firm to be independent, they must be able to undertake comprehensive and fair analysis of the relevant market which is both unbiased and unrestricted.

Being independent does put additional pressure on firms to ensure they establish and maintain adequate knowledge of the many retail investment products in the market. There are also increased compliance costs attached to firms who offer independent advice.

It’s usually a lot easier to identify an Independent Financial Advisory firm (IFA), who are perhaps more inclined to promote their status. However, some restricted advisers are not calling themselves as such; an issue for people looking for advice who should be able to define this without difficulty.

Restricted firms should offer an explanation about whether their advice is limited to retail investment products from a single company, a single group of companies or a limited number of companies.

Importantly, neither independent nor restricted advisers are incentivised to recommend one product over another.

In summary, if you are getting advice about investing your money, you need to know there are two different types of financial advisers – ‘independent’ and ‘restricted’. This can affect the advice you are given.

All financial advisers have to be approved or authorised by the Financial Conduct Authority (‘FCA’).

 

 

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Making Gifts on behalf of the donor…

In the light of some recent judgments by the Court of Protection, the Office of the Public Guardian for England and Wales has updated its legal guidance for professional deputies and attorneys on making gifts of a protected person’s property.Screen Shot 2018-03-29 at 13.37.32

The basic rule

Attorneys can only make gifts on behalf of the donor:

  • in some limited situations, and
  • if it’s in the person’s best interests.

Donor’s capacity

Before making a gift, an attorney must consider whether the donor:

  • has mental capacity to understand the decision to make a gift, and
  • if they can take part in the decision.

If the donor has capacity to make a gift, then they should normally make the gift themselves, rather than tell the attorney to make it on their behalf.

If the attorney considers that the donor has capacity to make a gifting decision, they should keep a record of the steps they took to make sure they did.

However, the latest legal guidance goes on to say that even if the donor apparently has capacity to make a gift, the attorney must still use care and caution when the donor expresses a desire to make one. If a substantial gift is involved, the attorney may need to seek advice or arrange for a mental capacity assessment, or both.

If the donor lacks capacity then, as with all decisions an attorney makes, the main test is whether it is in the donor’s best interests.

The “best interests” test

A best interests decision is not the same as asking what the person would decide if they had capacity. You have to think about:

  • whether the person was in the habit of making gifts or loans of a particular size before they lost capacity
  • the person’s life expectancy
  • the possibility that the person will have to pay for care costs or care home fees in future
  • the amount of the gift – it should be affordable and no more than would be normal on a customary occasion or for a charitable donation
  • the extent to which any gifts might interfere with the inheritance of the person’s estate under his or her will, or without a will if one has to be created
  • the impact of inheritance tax on the person’s death.

What is a gift?

It is also important to remember that a gift is when you move ownership of money, property or possessions from the person whose affairs you manage to yourself or to other people, without full payment in return.

A gift can include:

  • making an interest free loan from the person’s funds, as the waived (dropped) interest counts as a gift
  • creating a trust of the person’s property
  • selling a property for less than its value
  • changing the will of someone who’s died by using a deed of variation to redirect or redistribute the person’s share in the estate (meaning someone’s property and money)
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Spring Statement 2018

Mr Hammond came under pressure ahead of the Spring Statement to loosen the purse strings, but he chose to announce no new spending measures or tax changes.

If these are to come, they will be in the Autumn Budget, the sole ‘fiscal event’ of the year.

Meanwhile the focus of the Spring Statement was on the economy and the public sector’s finances.

14 page summary available below…

Sprint Statement - Summary

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Pension-led funding for small businesses – could it work for you?

Following Britain’s decision to leave the EU, it’s fair to say there’s been a pretty major impact on uncertainty amongst businesses, even if a relatively benign economic impact to date.Pension Led Funding
 
It means that, added to the mix of higher costs, weak domestic growth and lacklustre consumer demand – optimism has been dampened among many British small businesses. (The Federation of Small Businesses said confidence among members fell to a four-year low in the last quarter of 2017).
 
This macroeconomic backdrop is very much influencing business owner decisions concerning both how they fund their businesses development – and indeed how their business might fund exit planning and retirement. 
 
In terms of business capital, SME’s and start-up businesses have been forced to look at alternative finance options to grow their business. Peer to peer lending such as crowd funding has been one of the most publicised, however other options do exist.
 
One that has been perhaps overlooked a little is ‘Pension-Led’ funding. Essentially, this is about making your pension work harder, through business owners borrowing funds from an existing pension and investing these into their company.
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National Saving and Investments – Is it really worth it?

Last year, MoneySavingExpert.com founder Martin Lewis published an article regarding National Savings and Investments Premium Bonds. It seems as thougeggs-1572853-1280x960h Martin is not a great advocate of them having used “exclusive statistical analysis to interrogate whether premium bonds are worth it”.

The truth of the matter is that people do not take out Premium Bonds because the odds are in their favour, but simply because there is a chance of a life changing opportunity every month and it’s a safe, tax-free way of investing your money.

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Inheritance Tax Planning – The Main Residence Nil Rate Band

In our last blog, ‘Inheritance Tax on Gifts’, we shared a number of
opportunities for effective Inheritance Tax (IHT) planning. The most straightforward of these being gifting assets to reduce the value of your estate…IHT Blog

Furthering the opportunity within the IHT space is the Main Residence Nil Rate Band (RNRB), recently introduced (6th April 2017) with the objective to reduce the burden of IHT for most families by making it easier to pass on the family home to direct descendants without a tax charge.

How does this work in practice?

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Inheritance Tax on Gifts

Inheritance Tax (IHT) is said to be the only “voluntary” tax. As with inheritance tax mitigation, it is possible to reduce liability or remove it completely.

The Nil-Rate Band

The nil-rate band is the value of an moneyestate that is not subject to Inheritance Tax in the United Kingdom.

The current nil rate band values at £325,000 per person. Anything above the nil rate band can be subject to Inheritance Tax upon death. In other words, do nothing and 40p in every pound of your inheritance or estate may be winging its way into the government’s pockets so it’s important to understand just how tax mitigation can work.

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