Tax Planning In Uncertain TimesSwindells & Gentry

Robin Stevenson Duncan Orr

Ridgeview Wine Estate

8th December 2010

Agenda

Inheritance Tax – Background and Coalition position Calculating your Inheritance Tax liability IHT allowances (gifting) and Trust planning Objections to and risks with IHT planning Three simple IHT mitigation Strategies

o Reducing the IHT liability

o Funding the IHT liability

Bringing it all together Questions

New Partners

IHT been around for a long time

????- 1975 Estate Duty

1975-1986 Capital Transfer Tax

1986- date Inheritance Tax

Government Approach

IHT hasn’t really changed since 1986.

Prime target for a rethink?

Government Receipts

Inheritance Tax £2.4 Billion

Basic IHT ComputationTwo Occasions for IHT

First Gifts during lifetime

Note: Fall in value of estate, not value of gift!!

Gifts to individuals are Potentially Exempt Transfers – PET i.e. NO IHT if survive seven years!

Gifts to non-people (i.e. companies or trusts) are Chargeable Lifetime Transfers (CLTs) not PET’s i.e. Chargeable to IHTo 0% Nil Rate Band (£325,000)o 20% Lifetime rate (everything over £325,000)

Basic IHT ComputationTwo Occasions for IHT

Second

IHT on death

Gifts within previous seven years

Assets - What’s included? Everything!o 0% Nil Rate Band (if any left over!)o 40% Death rate

Simple IHT computationAssets at date of death

House £400,000Less Mortgage (£100,000)

£300,000Shares £100,000Other e.g. Savings £100,000

£500,000

£325,000 x 0% = 0%£175,000 x 40% = £70,000£500,000 £70,000 IHT Liability

Basic IHT comp

Transferable nil rate band Spousal exemption

What’s the difference ?

Make use of allowances Annual exemptions

o £3,000

Small gifts to same persono £250pa

Regular gifts out of incomeo Unlimited

Agricultural/ Business property relief (APR/BPR)

Marriage giftso £5,000 Parento £2,500 Grand parento £2,500 Spouseo £1,000 Anyone else

Gifts have to be outright gifts – watch out for GROB’S &

POAT!!!

See HMRC as a beneficiary

Inheritance tax can be cruel

Simple Family Trust

Settlors

Trustees

Beneficiaries

Basically two different kinds of trust

Discretionary Trusto Trustees decide when and what to distribute to the

beneficiaries, if anything at all!o Beneficiaries have no right to the income or the assets

Interest in Possession or Life Interest Trusto Trustees have to pass income to the beneficiarieso Beneficiaries have a right to the income.

Perhaps the trust might be a mix of the two!

Why a Trust? Protection of assets

o Trustees retain control, beneficiaries have limited rights.

o Divorce and bankruptcy of the beneficiary.

o Can also protects assets from settlor’s creditors.

o Gold diggers.o Immature beneficiaries.

From a tax point of viewo Forces an IHT charge. Not a

bad thing!o Rule change in 2006 –

A&M tax break stopped!o Taxed as a separate entity

from settlor and beneficiary.

o Discretionary Trust taxed at higher rate.

o Interest in Possession taxed at basic rate.

o R185 passed to beneficiary to declare on tax return.

Agenda Inheritance Tax – Background and Coalition position Calculating your Inheritance Tax liability IHT allowances (gifting) and Trust planning

Objections to and risks with IHT planningThree simple IHT mitigation Strategies

Reducing the IHT liability Funding the IHT liability

Bringing it all togetherQuestions

Barriers to IHT PlanningLoss of Capital – Are you happy to gift outright

sizeable sums?

Loss of Income – Can you afford or are you comfortable losing an income stream?

Lack of flexibility during lifetime – Advances to beneficiaries?

Complexity – Understanding?

Change of circumstances – Can you unwind?

Social Impacts of gifting

Divorce

Bankruptcy

Long Term Care

Three major Risks with IHT planningLegislative

• Change of Government• Change of Policy

Taxation • Trust Taxation• Change to BPR• 7 Year rule etc…

Investment • Orthodox Investment risk• Illiquid Assets

Three strategies to reduce your Inheritance Tax

liability

Strategy 1

Flexible Trust Planning

Why use a “Flexible” Trust

Control - Gifts (Potentially greater than £325K) where control and access (income) are required

Access – retain right and flexibility over future income stream

Tax Savings – Immediate IHT saving, Tax-free growth, further IHT after 7 years and No Income Tax on death

Simplicity – No probate req’d, cash to beneficiaries

Trust Planning (Mechanics)

Cash into Trust – Structure agreed

Immediate IHT saving e.g. Female, aged 73, 5% p.a. - £250K Trust….discount £128K…IHT saving £51K

Totally bespoke investment strategy

Regular Reviews

Yr 7 – Balance of Trust out of estate-£122KTrust ends – distribution before Probate

Investors Estate

In any year some, all or none of a reversion can be taken

Chargeable gain assessable at Settlor’s marginal rate of income Tax

No Income Tax on death

Postponement does trigger Tax events

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Year 2 Year 3 Year 4

Year 14Year 13

Year 6 Year 7Year 5

Year 9 Year 10 Year 11 Year 12

Year 8

Year 16Year 15

Year 1

££

£ £

Strategy 2

Investments qualifying for Business Property Relief

(BPR)

Business Property Relief (BPR)• Qualification can be complex• BPR available on “Relevant Business Property which

has been owned for 2 Years at the rate of 100%” (Inheritance Tax Act 1984 Sections 105 and 106)

Relevant Business Property includes:-

• The shares of an unquoted company which is undertaking permitted business activities.

• Permitted business activities includes trading but not investment

Why invest using BPR Strategies?

Gifting – Concerns re Bankruptcy & Divorce

Speed – Unlike gifts (7 Years) IHT free after 2 Years

Access – Liquidate and use if required

Control – No loss of asset

AIM Share Portfolio performanceNov’ 2004 – Nov’ 2010

66% drop!!!

“Lower Risk”Business Property Relief

Qualifying Investment strategy

Fund Structure:Limited Liability Partnership

• Care Hom

e• £2m

• Care Hom

e Operator

• Health

Club• £1.5

m

• Health

Club Operator

• Property Development

• £1.5m

• Property Developer

• Pub• £1m

• Pub • Oper

ator

• Two Hotel

s• £4m

• Hotel

Operator

• Subscriber 1• £50,000

• Other Subscribers

• £9,850,000

• Subscriber 2• £100,000

• XXX IHT Fund • Limited Liability Partnership

• £10m

• XXX Fund Management LP

(Manager)

• XXX Corporate Finance Limited

(Sponsor & Operator)

• Experienced operators (Business Managers)

Investment Strategy

Entrepreneur Funds

IHT LLP Funds

Safety cushion(at purchase)

Safety cushion‘Trading Uplift’

over time

Partnership agreement

Investment Example 1

Armley Developments LLP (“Armley”)

• Residential development three miles from Leeds city centre

• 12 two-bedroom flats completed January 2009

• To date 4 flats sold and 5 are tenanted on rent to buy

• Invested December 2008 to replace HBOS bank-facility

• Priority return of 9%

• IHT Funds’ exposure is now below 50% of value

Investment Example 2

Urban and Country Leisure (Warwick) LLP 19-letting bedroom poorly operated Thai themed bar restaurant in the centre of Warwick

Purchased property for £1.6m in May 2010 with a £900k (16-week) extensive redevelopment

programme which commenced in June 2010

Re-opening in October 2010 as an exclusive boutique B&B with a stylish and contemporary

steakhouse bar and grill on the ground floor

Property purchased as a joint venture with Urban and Country Leisure, who own and operate a

number of similar venues in central and southern of England

Purchase of property and all refurbishment works funded 80% by the Downing IHT Funds, 20% by

Management

Priority return of 8.4% pa and 50% of profits

Business Property Relief

Alternative “Lower Risk” Investment strategy

CAPITAL PROTECTIONEXAMPLE TRADE

90 Days

£100

180 Days£103£97

0 Days

CAPITAL PROTECTION

SUPPLIER RETAILERCREDIT INSURANCE

InvestorCompany

For illustrative purposes only

SUMMARY

Full Control - Investors retain full access and control over their money.

Quick - IHT exempt in just 2 years.

Simple - No complicated and expensive trust structures to set up and operate.

Income or Growth - Investors can choose growth or income up to 10% p.a.

Lower Risk – Aiming for capital preservation and predictable returns

FAST CONTROL

SIMPLE

INCOME

PROTECTION

Strategy 3

Use Life Assurance

Why use Life Assurance?

Simple and non-contentious

Can be used to cover all/part of any IHT liability

Can also cover gifts (7 years) e.g. (M) 72 + (F) 70 £100K - £2,000 p.a.

No loss of control of existing assets

Affordable – children assist with cost of premiums?

Instantly funds any liability

Life Assurance (Mechanics)

Policy that pays a guaranteed sum on death or 2nd death

Once underwritten/medically agreed, premiums and payout will not change

Policy placed in suitably worded bespoke Trust

Policy Proceeds paid out free of IHT and….

Proceeds paid before Grant of Probate

Example (Non – Smokers)Male – Aged 72 Female Aged 70

Annual Premium £6,700

Providing £250,000 of Life Assurance (G’teed)

Net benefit to beneficiaries£250,000

Assume £6,700 p.a. invested and returns 2% p.a. (Net)

15 Years later – Lump sum of £124,883

After 40% IHT – Net sum to beneficiaries £74,929 approx. 30%

of Life Assurance

Managing and organising your IHT

plan

Adviser value is in discussing, creating and reviewing a

comprehensive and robust overall strategy, not simply selecting a

product

Question Time

Robin Stevenson Duncan Orr robins@swindellsandgentry.co.uk duncano@swindellsandgentry.co.uk

01825 763366 01323 894202