Post-Osborne estate planning

While we are awaiting Philip Hammond’s first Autumn Statement and the March 2017 Budget, what are we to do with four of George Osborne’s

key tax changes, which are reshaping our estate planning?

• Residence nil-rate bands (RNRBs): This major new inheritance tax (IHT) relief
  
  for homes takes effect from
  
  6 April 2017. Giving tax relief to just some beneficiaries (basically descendants,
  
  but widely defined), for the first time ‘who benefits’ is relevant to IHT treatment
  
  in an estate, other than spouses/charities, requiring careful consideration with wills. This change is popular – even if it is hugely complex and unfair to some. It is likely to stay and solicitors need
  
  to rethink will drafting and IHT planning in the light of these changes;

• The 3 per cent higher rate of stamp duty land tax on additional properties: This easy tax-raising measure is likely to stay, although failing the policy need to encourage first home-buying. A very specific exemption for replacing a main residence helps people buying a second or third home rather than a first. Professional bodies made representations to HMRC on this, but to no avail. If you have an interest worth £40,000 plus in a second property on completion
  
  day for a purchase, you are generally caught, so pay the extra 3 per cent on the price. This unknowingly catches many with small interests
  
  in family properties, such as those bought by parents as holiday homes. Lawyers have a significant role in advising clients on estate planning here, including reviewing trust structures where it
  
  can make a real difference whether or not a person has
  
  a trust interest in possession (IIP) or income entitlement. Sometimes it makes sense
  
  to change a trust to create
  
  an IIP, or to revoke one
  
  (even if temporarily),
  
  before a completion;

• ISAs: The Finance Act 2016 provides for secondary legislation to be made to extend the income tax
  
  and capital gains tax (CGT) advantages of ISAs to the period from death. Currently this is just from the date the surviving spouse applies for the ‘additional permitted subscription’ based on
  
  their deceased spouse’s
  
  ISA value. This encourages saving and should be continued, though timing
  
  is unknown. Meanwhile,
  
  real opportunities remain for surviving spouses to secure these tax advantages through cash subscription
  
  or taking on the actual investments in specie where ISAs were ‘inherited’. Again, some trust planning may
  
  be needed on how spouses inherit, which might be
  
  by an appointment out of
  
  a discretionary trust or by capital advancement from an immediate post-death interest trust within two years of death;

• Pension death benefits: Osborne changed the whole purpose of pensions from primarily secure retirement income to tax-effective passing on of assets and income to families. This
  
  may be the most vulnerable of these changes as it is seemingly too generous. While many will await future announcements to see if or how this changes, provided some benefits are retained
  
  a major review of estate planning is worthwhile.

Looking at these changes in

the round, leaving your pension wholly or largely untouched

so that death benefits can be passed to one’s family becomes

a key estate-planning option, if other assets can be drawn down to meet living costs. Clients

with substantial investment portfolios, cash, or other savings could consider spending capital in lieu of income. ISAs could be passed to a surviving spouse,

as capital to spend, rather than drawing on a pension.

Three vital elements concern lawyers. First, the two-year planning window from the first spouse’s death. Decisions need making on pensions – whether to take a lump sum, income, or ‘designate to drawdown’ – within this two-year period, tying in with the time limit for varying

an estate or trust so that it’s ‘read back’ to the date of death.

There is also the need to work with financial planners to help clients make the right decisions. As noted, many legal issues arise that need attention alongside estate administration, but tax and financial-planning input is also vital. Financial elements, such as drawing down capital, need consideration by experts. Working together we can help come to better decisions.

Finally, potential conflicts

of interest where acting for

a spouse and executors or trustees often arise. Sometimes, if considering an exercise of trustee powers, a surviving spouse may need to take independent legal and

financial-planning advice,

before decisions are made

within the two years.

John Bunker will chair the

 CLT Estate Planning Conference

in London on 8 November

John Bunker is head of private client knowledge management at Irwin Mitchell

@irwinmitchell www.irwinmitchell.com