Despite the Dilnot Commission’s July 2011 report into funding long term care, there is unlikely to be any certainty until new legislation comes into force, possibly not until 2014. It will be some time before we see how far the proposals are adopted.

Putting the Dilnot Commission’s proposals into perspective, it seems that individuals who need long term care in a residential or nursing home will often find themselves paying more than £35,000 towards the fees. The cap applies only to the cost of the care element. Most individuals, apart from those with very limited resources, will contribute £10,000 a year towards their living costs.

Many individuals will choose to pay additional fees for better accommodation than the local authority will fund. In addition, the house-rich, cash-poor will still need to use their home t fund their care costs, whether it’s sold during their lifetime or afterwards.

The Current Position

For those who self-fund their residential care costs, there is an NHS contribution towards nursing care costs that is subject to a needs assessment. From April 2011, this is a flat rate of £108.70 a week in England. However, some individuals still get the higher rate of £149.60, if they were assessed before 1st October 2007 as needing higher level nursing care and still require this. Different rates of NHS funding apply in Wales and Northern Ireland, and a more generous contribution is in place in Scotland.

There is also the possible entitlement to fully funded continuing NHS health care. An individual qualifies for this non-means tested support if their primary need is for health care. However, there is no right to choose the home where care is provided, and state benefits are affected in the same way as if the individual were in hospital.

Disregarded Capital for Means Testing

Some assets are disregarded as capital for the purposes of the means test. Surprisingly, this normally includes investments into life insurance investment bonds. This is because legally this type of investment is a life insurance policy. Because of this, the disregard does not apply to capital redemption bonds. The previous government consulted on removing the life insurance investment bond disregard. However, the coalition government dropped the proposed legislative changes, so the disregard currently remains in place.

Although the idea of having to sell up the family home causes concern, this should not happen while it is actually needed. For example, a home should be disregarded for the means test if it is still occupied by a spouse, civil partner or someone who is effectively a spouse or civil partner of the person needing residential care.

The content of this blog is for information only and does not constitute advice. It is based on our opinion and understanding of legislative and regulatory aspects of the financial arena.  We strongly recommend that you seek professional advice before embarking on any course of action.

In an environment where there is this uncertainty, flexible IHT planning solutions, that suit a client’s requirements irrespective of unreliable political factors, become increasingly compelling.

Originally designed for entrepreneurs passing on family businesses, Business Property Relief (BPR), BPR delivers full relief from IHT on qualifying companies owned for at least two years. However, it is through portfolios of Alternative Investment Market (AIM) stocks and unquoted company shares that it has become an highly accessible option for a much wider number of clients.

BPR solutions have evolved considerably over the last few years. However, there are a number of benefits common to the vast majority of solutions:

Speed of IHT relief – BPR portfolios are IHT free once held for two years, and many solutions offer insurance options to cover the risk of death within the first two years

• Access and control – Clients can access part or all of their money at any time, providing the ability for them to adjust their investment based upon changing circumstances, including changes in the IHT rules.
• BPR does not use the nil rate band – This means that clients can utilise this allowance in less liquid assets, such as their homes, which are otherwise difficult to place outside the estate
• Flexibility – This includes transfers between spouses without “resetting the clock” on the two year BPR qualification period
• Income options – Many BPR solutions can be used to generate an income, and this can be easily adjusted over time to meet changing requirements. BPR products can be combined with trusts, including allowing the client to meet specific objectives where once product alone is sub-optimal.

Another important point to note is that, under Power of Attorney legislation, setting up new trusts is not permitted, and the Attorney is not completely free to make other gifts, limiting the scope for IHT planning. In some cases applications can be made to the courts but this can be a long and expensive process. However, BPR investments are allowed under Power of Attorney legislation as there is no gifting involved.

The Financial Services Authority does not regulate taxation and trust advice.

There are major possibilities why one or other party could be prevented from getting fair value:

This is the reason why different actuaries, quite legitimately, come up with different values for the same member’s pension. It is possible to challenge the assumptions used if you believe they over- or under-estimate the true value of the pension. Which side you represent will affect how you want to alter the assumptions. So long as the assumptions remain reasonable this is allowance. In practice however a single joint expert may be asked to provide a fair valuation on behalf of both parties.

 The CEV will typically be calculated as at the normal retirement date of the scheme, although trustees are required to consider what allowance to make for any option the members has that would increase the value. For example the member can retire early without consent with no reduction applied for early retirement. So some allowance, full allowance, or no allowance may be made within the CEV. Some schemes, predominantly in the public sector, allow members to retire earlier on full pension. If there is a good cause to believe the member will retire early the spouse may have reason to contend that the pension has been undervalued if the CEV does not fully reflect that the member could retire early on full pension.

 The CEV does not take into account certain benefits such as Death In Service (DIS) and may not take into account any discretionary increases to the benefits. These may be valued in their own right.　

 A divorce settlement will be based on assets acquired up to the time of the divorce. The CEV in a defined benefit is only based on benefits that have already accrued to the member and makes no allowance for future salary increases. There are instances however where accrual is not uniform, and a spouse may argue for larger share of the CEV if future salary increases are expect to exceed the price inflation. This is most likely where the member is in line for a promotion, accompanied by a significant salary increase and / or improvement in the accrual rate.

 The typical CEV assumes that the scheme is fully funded. However, many defined benefit schemes are currently in deficit. If this is the case the trustees may reduce external transfer values in order to protect the remaining scheme members against an unfairly high transfer value out of the scheme.

 Certain product features also present potential problems. For example Retirement Annuities (s226 plans) often carry guaranteed annuity rates which are of greater value than the CEV would suggest. Other guarantees such as GMPs and with profits funds should also be taken into consideration.

The content of this blog is for information only and does not constitute advice. It is based on our opinion and understanding of legislative and regulatory aspects of the financial arena.  We strongly recommend that you seek professional advice before embarking on any course of action.

1. Regulation

All solicitors are regulated. Some will writers are regulated by the Institute of Professional Willwriters (IPW) through it’s code of practice, approved by the Office of Fair Trading. However, some will writers will not be subject to regulation

2. Check qualifications

Always ask solicitors about qualifications and training. They won’t necessarily have studied this area to become qualified as a solicitor.

3. Check professional indemnity insurance cover

It is mandatory for all solicitors to have this insurance and for all members of the IPW to have this cover. Professional indemnity insurance will compensate your beneficiaries if a mistake is made in your will.

4. Be suspicious with low cost wills

Some providers will set their fees for wills at low prices to “hook” customers in and then sell other services to them at high cost. If a will costs less than £100 for a single person or £150 for a couple, it is difficult to understand how the provider is making money unless they are cutting corners or making money elsewhere. Always check if the prices quoted will have VAT added to them.

5. Ask for a price list of all services

You need to understand the full cost of the service, because the cheapest will may not be the cheapest solution in the end, once other services you need such as trusts or lasting powers of attorney are included.

6. Ask about the cooling-off period

If you see a will provider in your home, the law gives you a seven day cooling off period. You can waive this right but be suspicious if your will provider asks you to do so unless you need your will to be completed urgently.

7. Find out if you can get a refund

If you are asked for payment in advance, find out what happens if your will provider fails to deliver the service, it is delivered late or you are not happy with it. Any member of the IPW who collects payment in advance has to be part of a scheme run by the IPW that will refund the payment or provide for the service to be completed by another member in these circumstances.

8. Select your executor

Be are that you do not have to appoint the will provider as the executor of your will. Administering your estate may not be difficult so you can appoint family members or friends. If the named executors find the process too onerous, they can seek professional help and agree fees accordingly at that time.

9. Find out what happens if things go wrong

You should be provided with this information without having to ask for it. If things go wrong with a solicitor, you can refer matters to the Legal Ombudsman. If you choose a member of the IPW, you can refer members to the Estate Planning Arbitration Scheme. Both are independent.

10. Do not pay in advance for a firm to administer your estate

Never pay a fee at the time of making your will for someone to provide assistance after your death to administer your estate. There can be no guarantee that the firm you pay will still be business when you die.

The Financial Services Authority does not regulate will writing, taxation and trust advice.

The content of this blog is for information only and does not constitute advice.  It is based on our opinion and understanding of legislative and regulatory aspects of the financial arena.  We strongly recommend that you seek professional advice before embarking on any course of action. 

By paying their spouse or civil partner a salary, this tax deductible business expense will mean lower taxable profits for the self-employed person, and so lower tax and NIC for them. Assuming this is the spouse’s only income, and it is paid below tax and NIC thresholds, the couple’s total disposable income of the couple will increase from the “before” scenario.

The self-employed business owner could pay an employer pension contribution for his spouse or civil partner, which would further reduce his taxable profits. A pension has been provided without any effective cost to the couple.

It should be noted that a spouse / civil partner must actually work in the business to receive a salary to be a legitimate employee – answering the phone at home is not sufficient! So, in this type of scenario the following issues are a consideration:

• - a spouse / civil partner must actually receive payment
• - the salary must be justified for the work done
• - the work has to be realistic in relation to the structure of the business
• - the hours worked must be reasonable and there must be a realistic rate of pay

There is no reason why this same idea cannot be applied to a spouse or civil partner employed by their husband / wife’s limited company. The same rules and principles apply, although the calculations will be different to take into account corporation tax rather than income tax on business profits, and of course consideration should be made for possible dividend payments.

Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

The Financial Services Authority does not regulate taxation advice

The content of this blog is for information only and does not constitute advice.  It is based on our opinion and understanding of legislative and regulatory aspects of the financial arena.  We strongly recommend that you seek professional advice before embarking on any course of action. 

The trust is set up with a loan of cash from trustees.  The trustees then invest the lent amount on behalf of the trust beneficiaries.  The loan itself is not a gift for IHT purposes as it remains an asset in the individual’s estate and they can call upon it at any time. 

Where no “income” is required by the client, they may question why a loan trust might be recommended.  It’s important to understand that the value of the gift will still be chargeable to IHT at 40%, but that all investment growth is immediately outside the estate from day one.  As an example, if a client had invested £200,000 to an investment bond which  at the time of their death after ten years was worth £300,000, inheritance tax of £120,000 would be payable.  If however the same client had executed a loan trust and invested £200,000, the IHT payable on death would be £80,000 (40% of the original investment).  All growth is immediately outside the estate from day one. 

Alternatively, where income is required, the potential for inheritance tax on the outstanding loan can be reduced where the loan is repaid to the settlor by regular instalments.  These would be funded by 5% tax deferred withdrawals from the bond.  Provided such loan repayments are not accumulated elsewhere in the estate, the taxable asset (the loan) will gradually reduce in value, as will the resulting inheritance tax liability on the estate. 

This article is for information only and is not advice.  You should always seek independent financial advice before embarking on any course of action.

Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the individual.

Often clients will want to ensure that alongside their children and other family members, charities will benefit on their death, and it’s therefore important to consider what might be the best way of achieving that aim.  You have the choice of making your charitable donation either from your estate or from your pension fund, with whatever is left from either source going to your beneficiaries. 

On estates over a certain size (£325,000 in 2011/12) inheritance tax will be payable at 40%, whilst a lump sum death benefit paid from your income drawdown arrangement to family members will now attract a tax charge of 55%.  Therefore it now makes it more tax efficient for family members if the charitable donation is paid from the pension as this will mean a greater proportion of what they receive from the estate and pension will be taxed at 40% rather than 55%, whilst the charitable payment from the pension will be tax-free. 

These changes represent a need to reappraise wills and death benefit expression of wish forms.  

This article is for information only and is not advice.  You should always seek independent financial advice before embarking on any course of action.

Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the individual.

It is therefore important, especially in this time of low interest rates, to protect wealth from the damaging effects of inflation.  By considering your needs for short, medium and longer term funds, you can develop a portfolio of deposits and investments suited to both your attitude to risk and your need to take risk.