Updates
Amendments to the 2nd Edition Text, since 12 March 2024
Lasting Powers of Attorney (page 12)
Once the LPA has been registered, it is worth noting that the attorney(s) can act even while you the donor have mental capacity – as long as you instruct them to do so. On registration, the OPG will write to both the donor and the attorneys with an LPA reference number and an activation key. This information will enable the attorney(s) to activate the LPA online on the Government’s website.
The Intestacy Rules (page 29)
While the definition of ‘children’ includes legally adopted children, it does not extend to step-children.
For brothers and sisters to inherit, they must share both parents with the deceased: ‘half-blood’ siblings do not qualify.
Making and updating your Will – and any letters of wishes (page 31)
Care needs to be taken in the event of a second marriage/civil partnership, in circumstances where, in particular, there are children/grandchildren surviving from the first. As noted in the previous paragraph, new Wills should standardly be made and a parent/grandparent should take thought as to how any provision for their children/grandchildren from the first union should be protected, especially in the event of their death and a third or subsequent marriage by the surviving spouse/civil partner. Subject to Inheritance Tax considerations, a Trust for the benefit of those children/grandchildren might well be best solution. One idea might be to give a right to income (but not capital) to the surviving spouse/civil partner, followed by a gift to the surviving children/grandchildren on that survivor’s death.
Pensions (pages 55 and 56)
The text is slightly amended as follows:
The first thing to say is that the pensions regime is horribly complex and that this is a VERY bare summary on which you should not rely: professional advice is essential. Note the warning on page 8.
On your death you may have a prospective entitlement either under a defined benefit pension (for example, a final salary pension), to which you and your employer have been contributing, or under a money purchase pension (for example, a personal pension, such as a Self-Invested Personal Pension or SIPP). In either case you should consider what will happen on your death.
With a defined benefit pension which you haven’t yet started to access, what happens in terms of procedure and so tax implications rather depends on the pension provider’s own rules, which you should try to find out, in particular, because they may override your wishes. The pension provided will certainly want to have a copy of your up-to-date Will. And you should also let them have a specific nomination of your chosen recipient(s) of any amounts payable after your death.
With a money purchase pension, you should nominate your chosen recipient(s) to the pension provider, though this will not be binding. The value on death irrespective of age will normally pass free of Inheritance Tax (subject to one rare exception). There is a big difference between dying under the age of 75 and having attained at least age 75. If you die aged under 75, the recipients (as designated by the pension provider) can draw the fund value at any time, free from any Income Tax (or Capital Gains Tax) also. However, note that the freedom from Income Tax depends upon (a) payment made within two years after the scheme administrator first knew (or could reasonably have been expected to know) of your death; and (b) upon the fund value being less than the lifetime allowance (or higher protected amount) – see page 56. If you die aged at least 75, while there will still be no Inheritance Tax liability (subject to that rare one exception), the withdrawal of funds from the scheme will attract Income Tax in the recipient’s hands at their marginal rate.
Interestingly, if you have no dependants, the trustees can pay a lump sum death benefit out of pension funds whether uncrystallised or in drawdown to a charity nominated by you without using up or being limited by your lifetime allowance (see below). While it may be sensible in financial terms for the value to go to a surviving spouse/civil partner, this rather ‘wastes’ the Inheritance Tax exemption (unless the whole remaining fund will have been spent by the second death). It all depends on your respective ages and states of health, on your overall financial circumstances and on the value of the pension fund within that. If you want your surviving spouse/ civil partner to have access to the pension fund after your death, there may be a case for transferring the value to an outside settlement already established for the purpose, where under current rules the Inheritance Tax liability would be limited to 6% at most every ten years – and the rate may be much less than that.
Alternatively, you might have started drawing on your pension by the time you die, whether defined benefit or money purchase. If defined benefit, again the position will depend on the pension provider’s specific rules. Under a money purchase arrangement, the income will be being paid to you either as an annuity or by drawdown. If by drawdown, the pension fund remaining on death can be transferred to any nominated beneficiary, whether spouse/civil partner or children. For purposes of the lifetime allowance any inherited pension can be held alongside their own, without eating into it. As above, if you die before age 75, there will generally be no Inheritance Tax liability, though there could be Income Tax to pay if the amount exceeds your own lifetime allowance (unless already tested by a pre-6 April 2024 crystallisation). If after age 75, there is no lifetime allowance and any withdrawals from the inherited pension fund will attract Income Tax for the recipient. The standard lifetime allowance was £1,073,100 in 2022/23 and 2023/24 (although some savers have locked into higher amounts).
Very significant changes to the pensions regime were made by Finance (No2) Act 2023, including abolition of the lifetime allowance (though it does continue for some purposes). Further substantial changes will take effect from 6 April 2024: see the Updates tab on the website for developments here.
Pensions: changes from 6 April 2024 under Finance Act 2024
The very substantial changes made (on which HMRC have issued some guidance) are beyond the scope of this book. Again, I emphasise the importance of getting proper professional advice. The only point to mention in the present context is that the amount which may be liable to Income Tax on beneficiaries following the pension-holder’s death under 75 will depend on whether the fund went into drawdown before 6 April or after 5 April 2024. If before 6 April, there will generally not be an Income Tax charge (since the allowance will have already been tested on crystallisation). If after 5 April, the amount of a lump sum paid out which exceeds the deceased member’s available allowance (standardly £1,073,100, subject to having locked into a higher amount) will be subject to Income Tax at the recipient’s marginal rate. Otherwise, the position is much as described on pages 55 – 56.
Pensions: Budget 2024 on 30 October 2024
Very significantly, all unused pension funds at death will become subject to Inheritance Tax from 6 April 2027, due from the pension scheme administrators six months after the end of the month of death. This will restore the position to what it was before the 2015 reforms. And it looks as though amounts paid out will attract Income Tax at the recipient’s marginal rate, so triggering an element of double taxation. This will bring to an end the current (general) freedom from Income Tax for an inherited pension fund on death before age 75. However, we should wait until enactment of the Finance Act before being sure of the new rules.
Inheritance Tax – The General Rule on Death (page 65)
Paragraph 2 last sentence: replace as follows:
The chargeable estate on death includes any ‘failed’ potentially exempt transfers, that is gifts which the donor fails to survive by seven years (see page 66). Where the gift exceeded the nil-rate band of £325,000 and more than three years have passed since the date of the gift, ‘tapering relief’ applies to reduce the rate of tax charged.
Inheritance Tax (page 68)
Add new section at the foot of the page:
Budget 30 October 2024
Remember that the proposals are subject to any amendments before the new rules are enacted. You should be aware also that, if the changes to Agricultural and Business Property Relief do become law much as proposed, there could well be some impact in value for both farmland and indeed businesses (whether sole trader, partnership or companies).
First, the two nil-rate bands of £325,000 and, for a residence, £175,000 described on page 65 will be frozen until the end of tax year 2029/30 (that is beyond the end of 2027/28) as enacted by the previous Conservative Government. Interestingly, the basic nil-rate band has remained at £325,000 since 6 April 2009.
Second, major changes have been proposed to the regime for Agricultural and Business Property summarised on page 68, with two significant restrictions to apply from 6 April 2026. The two reliefs will apply only to the first £1m of the total value of qualifying Agricultural and Business Property in an Estate. Above that threshold the relief will be restricted to 50%, that is producing an effective rate of Inheritance Tax of 20%, albeit payable over ten years. Interestingly, the £1m threshold is given per taxpayer, so it would apply separately to individual partners/shareholders and indeed to Trusts (see the next paragraph). That said, if on or after 30 October 2024 an individual creates more than one Trust, the £1m threshold is divided between all such Trusts. Shares quoted on certain Stock Exchanges such as the Alternative Investment Market (or AIM) attract 100% Business Property Relief once owned for two years, given that the business of a company is a qualifying trade. As from 6 April 2026 such relief will be restricted to 50%. As for Agricultural Property Relief, while use for agricultural purposes is necessary, the relief will as from 6 April 2025 apply to land managed under a qualifying environmental agreement, as proposed by Jeremy Hunt’s Budget on 6 March 2024.
There are two types of Trust (or Settlement) for Inheritance Tax purposes: an interest in possession trust and a relevant property trust. An interest in possession trust (in which one or more beneficiaries have a right to the income as it arises) comprises both such a trust made before 22 March 2006 and such a trust arising under a Will (which is called an ‘immediate post-death interest’ or IPDI). The beneficiary under an interest in possession trust is treated for Inheritance Tax purposes as if he/she owned the property outright. A relevant property trust comprises both discretionary trusts made before 22 March 2006 and any type of trust made since then. They are subject to a ‘periodic’ charge to Inheritance Tax every 10 years, standardly at 6%. Under the Budget 2024 proposals, that rate of 6% will be reduced to 3% in the case of qualifying Business and Agricultural Property.
Finally, note that, on domicile, Rachel Reeves has confirmed the changes proposed by Jeremy Hunt in his Budget of 6 March 2024 (see separate section), subject to some modifications, as well as making significant changes to the scope of Inheritance Tax for non-UK assets.
Appendix 7
SOME USEFUL RESOURCES
Books
Ritchie, Stuart, ’Who Will Get My Money When I Die?’ Rethink Press, 2024
Subtitled ‘The Concise Guide to Making Your Will and Reducing The Impact of Inheritance Tax on Your Estate’, this is a significant addition to the existing literature on the subject. Drawn on Stuart Ritchie’s extensive experience and advising a wide-range of clients (with lots of helpful real life examples), the book is a clear guide to mitigating potential Inheritance Tax liabilities, while planning for possible needs in old age and in case of ill-health. The book includes useful guidance on choosing executors and how to decide what to put in a Will.
Websites
End of Life planning – www.endoflifematters.co
Ann Kenrick OBE, former Master/CEO of the Charterhouse charity which supports older people in need, provides support and guidance to individuals and groups to get their affairs in order and plans in place. Whatever your situation – young, older, or, like most of her clients, somewhere in the middle – you will receive personalised, creative and empathetic support relating to your particular life context. Ann also runs free Death Cafés and practical, interactive workshops for community groups and corporates.
INDEX (page 112)
Add Domicile 65, 68