Private Client UPDATE

Issue No.2 March 2005

Welcome to our second occasional update concerning private client matters.

Using Business Property Relief in your Will

With Inheritance Tax biting at 40% on taxable estates worth more than £263,000 taxpayers should consider taking advantage of every relief they can.

The interaction of surviving spouse relief and business property relief can be used to advantage. An asset consisting of a business, or an interest in a business, (with certain exceptions, such as an investment business) normally qualifies for 100% relief from IHT. Clients may like to consider giving such assets outright to children by will, with the bulk of the remainder of their assets passing to the surviving spouse.

As an alternative tax planning exercise, if it is intended that a surviving spouse will carry on the relevant business after the death of the spouse who owns the business, it may be possible to get business property relief twice. On the death of the first spouse the business property can be gifted to a discretionary trust set up by will. The surviving spouse then buys the business property from the trust. Provided the surviving spouse lives for a further two years after the acquisition, the subsequent gift of the business by the survivor in his or her will, will also qualify for relief.

Whilst shares quoted on a recognised stock exchange will not generally qualify for any business property relief, those quoted on the Alternative Investment Market normally do. Wealthier clients who are prepared to take the risk of owning AIM shares for a minimum period of two years prior to death may like to consider using the relief in the same way as outlined above through a portfolio of AIM shares. IFAs will be happy to advise on building such a portfolio.

How to save £105,200 by including a nil rate band trust in your Will

In our last update we looked at various tax planning measures that could be included in Wills. A number of our married clients are expressing interest in including a nil rate band trust in their Will. This has a number of advantages:

• When an estate is left to a surviving spouse no IHT is payable due to the spouse exemption. By creating a discretionary trust of an amount equal to the nil rate band this can enable full use of the nil rate band to be made on the death of the first spouse. This can result in a potential saving of £105,200 (i.e. 40% of £263,000).
• NRB trusts are particularly useful where there is insufficient cash or readily realisable assets in the estate. For many couples their house will be their main asset which they will wish their surviving spouse to enjoy. Selling the house will not be an acceptable option for many couples after the first spouse has died.
• By the creation of a mortgage or secured loan on the house passing to the spouse the amount of the nil rate band can be left as a loan outstanding. By careful Will planning there will be no need for the executors to actually raise an amount equal to the nil rate sum. The secured loan will be indexed linked to prevent the surviving spouse being deemed in effect to own the nil rate sum (i.e. to prevent the spouse being deemed to enjoy an interest in possession).
• By leaving the nil rate sum on discretionary trusts this allows the nil rate band trustees to decide after the death of the first spouse whether all or part of the nil rate sum is best left to the spouse or to the other beneficiaries of the nil rate band trust – often, but not necessarily, the children. A decision does not need to be made immediately as to who gets what, thus increasing flexibility in the distribution of assets.

The nil rate band trust will not be suitable for everyone. In particular some surviving spouses may prefer absolute ownership of all assets rather than decisions being made by trustees. Choice of the nil rate band trustees is therefore very important.

If you would like further details we will be pleased to send you our briefing note on nil rate band trusts. Alternatively, please feel free to speak to either Nick van der Borgh or Sharon Rutter by email or by telephone 020 7493 2903..

Enduring Powers of Attorney

EPA’s are likely soon to be replaced by new Lasting Powers of Attorney. The latter will require more stringent procedures to be followed before they can be put in place. We strongly recommend that if you have not already made an EPA you do so now; the Mental Capacity Bill as presently drafted envisages that EPA’s made before the new regime comes into being will continue to have effect. We will be pleased to send you a guidance note and questionnaire which explain the advisability of having an Enduring Power and the various options available to you.

Note:

Please note that this newsletter is not intended to be a comprehensive statement of the law and should be used for guidance purposes only. If you require specific legal advice please contact Nick van der Borgh or Sharon Rutter or by telephone 020 7493 2903.