Pension Practitioner
The SSAS Experts
26
APR
2016

Costly Tax Rules That You Don’t Know About

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On 17th July 2013, the UK Finance Act 2013 was introduced. Part of the Act confirms that not all debts of the Deceased’s estate will be deductible for Inheritance Tax (IHT) purposes on their death, where as previously they would have been deductible. ‘Section 175A 147a 1984 disallows a liability on death where the liability is not actually repaid out of the estate’. This is a significant issue that will impact many clients.

A consequence of the change to the Finance Act 2013 in relation to what extent liabilities are deducted from someone’s estate on death changes the way life assurance policies placed into trust post-July 2013 are settled into someone’s estate.

Here is the HMRC explanation of the changes, if you don’t understand this then it may be time to hang up your coat as an executor.

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A relatively modest size life assurance plan designed to repay your mortgage on death whether held in trust or not could, unintentionally tip your estate over the £325,000 (single) or £650,000 (married or civil partner) threshold and your beneficiaries could end up paying 40% tax that they needn’t of paid to the HMRC.

Mortgages and other debts of the Deceased will need to be repaid from the estate or transferred to the Beneficiaries with the debt attached if it is to be deducted from the estate for IHT purposes. Mortgages will be deductible as long as they are repaid from the estate or passed on to the Beneficiaries what may create a SDLT charge. In reality, this will not be as simple as changing the legal title, but will involve a new mortgage application which may or may not be possible. It will no longer be possible to deduct the mortgage liability paid off by a surviving spouse/partner directly. This would also be the case if the funds to repay the mortgage were from a Family Life Policy and the incorrect procedure was adopted on death. This is a common situation and will now have huge unintentional consequences for many clients. Practically if the liability is due to be repaid by a Life Policy assigned to a Life Company Trust, then it is the Trustees and Executors who need to know how to deal with this issue effectively.

It is crucial that the debt is repaid from the estate for it to be deductible. So, if the Deceased owned a Family Life Policy payable to the surviving spouse/partner, such as a Family Joint Life First Death Policy and they use these funds to repay the Mortgage – then, this debt MAY NOT be deductible from the Deceased’s estate for IHT purposes.

The other important point to take on board is that its business as usual for using Multiple Trusts where it is possible to put in assets, without triggering an IHT entry charge, on different days. So for example, using multiple trusts below the nil rate band dated on different days to receive annual gifts of surplus income is still good IHT planning, with care each trust need never pay IHT periodic charges. The same applies for assigning life policies into separate trusts on different days.

Main points to consider:

  • Don’t rely on the HMRC to send you in your lifetime or the executor of your estate an email regarding the most tax efficient way to settle the debts of the estate this doesn’t happen!
  • The onus is on the executor on death to ensure they understand their role and distribute the estate in a correct manner.
  • Being an Executor, is it an honour or a burden? If you don’t know how the HMRC operate or understand Inheritance tax this role will most likely be a burden so always appoint a professional as your executor, not a layperson.
  • When you take a life assurance policy out seek professional advice and in most cases it would be beneficial to place the policy into a trust.
  • The trust used should be fit for purpose and in the future have the flexibility to allow funds to be loaned the estate.
  • Life assurance policies in trust should always have a sum assured in multiples below the nil rate band (£325,0000) and the trusts or assignments should be dated on different days.

 

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