Inheritance Tax Case - Sisters Lose Test Case

For 30 years, Joyce and Sybil Burden, aged 90 and 82, have been battling to ensure that when one of them dies the other does not need to sell the home they share in order to pay an inheritance tax bill without success. However, when civil partnerships became lawful they thought they might be able to use discrimination legislation to aid their case. Were they not related, they could have formed a civil partnership and no IHT would be payable when the first sister dies but as they are related they are not permitted to do so. They have lost their appeal in the European Court of Human Rights (ECHR).

Mary Hazlewood says "The ECHR held by 15 votes to 2 that the Civil Partnership Act does not breach the prohibition of discrimination under Article 14 by not giving them exemption from IHT. The court said that as a marriage or Civil Partnership Act union is forbidden to close family members it was right that the sisters were denied the exemption. The sisters have written to the Chancellor of the Exchequer every year since 1976 asking to be treated as a married couple. Although it is within the Government's power to make an exception it is unlikely they will choose to do so.

However, there are a number of steps individuals can take to minimise IHT which in some quarters has been described as a voluntary tax on those not wise enough to plan to avoid it. For a start, assets given away more than 7 years before someone dies are entirely exempt and many individuals give their assets and houses away to avoid the tax entirely. There are complex rules against "reservation of benefit" but with legal advice many lawful arrangements which completely avoid the tax are possible. Secondly, for spouses there is no IHT until the second spouse dies and even then that spouse has the benefit of both their and their spouse's IHT exemption band.

Thirdly, most of those who die do not pay IHT simply because they are well below the threshold. For 2008-2009 this is £312,000. It is only those with assets worth £312,000 or more who have IHT to pay.

Fourthly, even with recent legal changes it is possible to put some assets in trust to avoid the tax. Many individuals put their life insurance policies into trust for their children, which avoids IHT in most cases. In addition, life policies can be taken out and put in trust and the proceeds used to pay the tax.

Finally all the IHT does not have to be paid at once. HMRC allow payments over 10 years.

If you would like advice on reducing the impact of IHT on your estate when you die, contact Mary Hazlewood on 01329 822333

Lasting and Enduring Powers of Attorney

On 1st October, new rules on powers of attorney come into force. It is wise if people appoint a family member or other person to look after their affairs in case they are later unable to do so. Often this is on medical grounds if they develop a condition such as dementia. This can be arranged in advance and the power registered when it is time to take control of the person’s affairs.

John Guest says:

“Until 1st October individuals can sign an “Enduring Power of Attorney”. Until it is registered, they can change the person they nominate and it will only be operated when registered after they lose the ability to manage their affairs. From 1st October, a new system comes into force but along the same lines. However, it is more complex and involves two separate appointments – one for management of finances and one about medical and health matters. There may be some advantage, in terms of simplicity and lower costs, in setting up the old Enduring Power of Attorney now, before 1st October, after which new powers must be the Lasting Power of Attorney (“LPA”).

“Whether before or after that date however, either forms of power are a very wise precaution, particularly given the increasing numbers of older people who lose capacity, who live much longer than was previously the case and indeed, in some cases are subject to financial elder abuse by neighbours, carers and ‘new friends’.

Individuals can make two types of LPA :

• Property and affairs, similar to an EPA.
  
• Personal welfare, which can include provisions for giving or refusing consent to medical treatment in circumstances where the donor has lost the capacity to make such decisions themselves.

The LPA has resulted from the Mental Capacity Act 2005 which is just coming into force now.

There are five key principles in the Act:

• Every adult has the right to make his or her own decisions and must be assumed to have capacity to make them, unless it is proven otherwise;
  
• Every adult must be given all possible help and support to make their own decisions, and to communicate those decisions where necessary, before they can be assumed to have lost capacity;
  
• Just because someone makes what might be seen as an unwise decision, they should not be treated as lacking capacity to make that decision;
  
• Anything done or any decision made on behalf of someone who lacks capacity must be done in their best interests;
  
• Anything done or any decision made on behalf of someone who lacks capacity should be the least restrictive of their basic rights and freedoms.

For further information to sign an Enduring Power of Attorney before 1st October, or after that date an LPA, contact John Guest on 01329 822333

Budget 2007

The Budget has now been announced and many tax changes will affect our local clients. There are the usual increases in allowances and closing of tax loopholes. Anyone who was hoping to avoid buying an annuity with their pension fund and pass the fund on to their children has had that plan blocked in most cases. Other changes include a new deadline – 31st October – for all tax returns to be completed.

For the 2007/2008 tax year the single person’s allowance is £5225. From 2008/9 the 10% initial tax band has been abolished completely and the lower rate is down to 20% from that year from 22% this year. This will be payable on income after deduction of allowances up to £35,800. In 2006/2007 employees pay national insurance on their annual earnings up to £33,540 at 11%. From April 2009 employees will pay NI and basic rate tax on earnings up to £43,000. The bands for both tax and NI will be aligned. National insurance is levied at 1% on that sum and above making the effect combined upper rate for 2007/2008 41%. Below that figure, national insurance contributions are 11%. For businesses from 1st April 2007 the level of turnover at which registration for VAT becomes compulsory is now set at £64,000.

Mary Hazlewood says “Inheritance tax for 2007/2008 is payable when the estate is £300,000 or over. However, we can help advise you as to how to minimise the tax particularly through use of a will, leaving up to that sum to children rather than a surviving spouse, to take advantage on the first death of that nil rate band. In terms of pension contributions for 2007/2008, individuals can put 100% of their annual earnings into a pension scheme or £225,000 whichever is the lower. This can be useful if an inheritance is received and the individual would like to use all their annual tax band for the pension or they live on investment or a spouse’s income and wish to save the entirety of their earnings. There were also changes to corporate taxation. Also, the Finance Act 2007 will define a Managed Service Company and treat income received from such an entity as subject to both PAYE and national insurance contributions from 6 April 2007. Any clients who make use of such companies should contact us for advice or on any other budget topic.

Call Mary on 01329 822333.