Would You Rather Give £110,000 To Your Family, Or To Gordon Brown On Your Death?

The idea of giving away huge chunks of your estate to save inheritance tax at first sight sounds attractive, until you realise that the money is gone for good, regardless of the needs of your surviving spouse.

In practice, therefore husbands and wives will often wish to leave the whole of their estate to their surviving spouse under the terms of their Will since the comfort and security of the spouse is paramount. Transfers between UK domiciled spouses are wholly exempt from Inheritance Tax and therefore there is no tax to pay on the first death.

Purely from an Inheritance Tax point of view, however, no advantage will have been taken of the fact that on the first death one can leave the nil rate band, currently £275,000, by Will to the children or other beneficiaries at 0% Inheritance Tax, and on the survivor's death another nil rate band will be available. This is a saving of Inheritance Tax of £110,000.

The problem with leaving this sum directly to the children is that it may not leave the surviving spouse with sufficient funds to maintain a comfortable standard of living, particularly where the estates are relatively modest. There is also the danger of children becoming insolvent or losing the inheritance in a divorce settlement, or not being “responsible” enough to handle receipt of funds directly.

The answer is for husband and wife to set up Nil Rate Band Discretionary Trusts in their Wills. The notes which follow assume that it is the husband who dies first.

On the death of the first spouse £275,000 from his estate, or the balance of the nil band then available (taking account of any lifetime gifts within the previous 7 years) is placed into a Discretionary Trust created by his Will.

The Trustees of the Nil Rate Band Discretionary Will Trust have complete discretion as to how and when the Trust funds are distributed. For this reason it is important that the surviving spouse be protected by appointing her as one of the Trustees with one or two friendly co-Trustees. (However, the Trustees should not be exactly the same group of persons as the Executors of the will.)

The Trustees of a Discretionary Trust have complete discretion as to how and when they distribute Trust funds. Trust funds can be used for the surviving spouse's benefit and any income may be paid to her to ensure that her comfort and security are not prejudiced. However, on the subsequent death of the surviving spouse, her estate should not include the amount in the Trust fund and so at current rates of tax the IHT saving on her death will be £110,000 (£275,000 x 40%). Any growth in the initial fund of £275,000 will also have escaped IHT on her death.

Where possible, it is advisable that the Nil Rate Band Discretionary Trust should be funded by cash and/or investments other than an interest in the family home. There is then no harm in the surviving spouse being one of the potential beneficiaries. The Trustees can resolve each year, it appropriate, to appoint the income to the surviving spouse (possibly not all the income every year or the Trust may be attacked as a sham) and if the income is insufficient they may also advance capital or lend capital to the surviving spouse.

Where the nil rate band amount can only be funded using a share of the family home, additional pre death arrangements are required.

It is usual for the family home to be owned by both spouses as "joint tenants". On the death of the first spouse, ownership of the whole automatically passes to the survivor and thus no part of the value of the home is available to fund the Nil Rate Band Will Trust. If the joint tenancy is severed so that the spouses own the property as "tenants in common", each spouse can leave his or her share under the terms of the Will. If no other assets, such as cash or investments, are available to fund the Nil Rate Band Trust, it would be possible for the Trustees to take a “charge” over the share of the property owned by the testator to satisfy the legacy to the Nil Rate Band Trust. This gives the surviving spouse the security of control over the home, but still enables the Nil Rate Band to be utilised on the first death. This is, however, a complex area and extreme care needs to be taken in drafting the Will and administering the Estate.

Should you have any queries regarding this article please contact Carolyn Spencer, Tax Manager on Carolyn@nunn-hayward.com or 01753 888211.

Second Company Car – Saving Tax !!!!!!!!!!!

Health warning: Do not show this article to teenage children !

Are you looking to buy a second car and have heard that the company can write off the entire cost against its profits in the year it’s purchased? Is this true?

I shall return to the health warning at the end of this article.

Technical background
If you purchase a car through your company, the company can claim capital allowances on the car and save tax on the allowances claimed. The user of the car has to pay tax on the car as a benefit in kind for using the car.

25% Capital allowances vs 100% tax write off
Normally, the company can not offset the full cost of the car against its profits. But, can only claim allowances known as capital allowance on the car equal to 25% of the purchase cost up to a maximum of £3,000 per car per year. Therefore, if a car cost more than £12,000, the maximum the company can claim against its profits in the year of purchase would be £3,000.

Energy efficient cars – If you purchase a car that was first registered after 17 April 2002 and has a CO2 emissions figure of less than or equal to 120g/km (i.e. the car tax band A or B), then you can claim 100% capital allowance. This means that you can offset the full purchase cost against the company’s profits in the year of purchase. This relief is due to be withdrawn for all cars registered after 31 March 2008.

Over last two years the number of low emission cars has increased significantly. You may be surprised to know that both Mercedes A160 CDI and the Audi A2 1.4 TDI Sport have been included as cars with low emissions. Check with the dealer or find out the emission figure yourself by visiting http://www.vcacarfueldata.org.uk/search/vedSearch.asp


Tax savings for the company
The company buys you a second car, for example, costing £14,500 say Audi A2 TDI Sport. As the car costs more than £12,000 it would normally be classified as expensive car for capital allowance purposes. So, the maximum allowance the company can claim on the car is £3,000 and the reduction in tax bill of £570 (assuming a 19% Corporation Tax (CT) rate). However, the CO2 emission for the car is 119g/km so the whole of £14,500 can be set against the company profits. This provides the company a reduction in tax bill of £2,755 (£14,500 at 19% CT rate), a tax savings in the first year of £2,185 (£2,755 - £570)

Benefits-in-kind
The user of the car will be taxed on the car as a benefit-in-kind. The benefit is a percentage of the list price of the car range from 15% to 35% depending on the CO2 emissions. For 2005/06, current tax year, if the emissions are under 145g/km, its 15%.

As the chosen car has lower emission, 119g/km, the benefit in kind would just be 15% of the list price. Assuming the list price of £14,500, this would lead to a tax bill of £870 for a higher rate tax payer (£14,500 x 15% x 40%)

Conclusion
So by purchasing a low emission car, not only are you getting 100% tax relief on the cost but you will have a smaller benefit in kind. Therefore, overall it’s a win-win situation.

Health warning: It does not matter how you use your 2nd car. If your teenage children were to have the use of it the tax and tax relief remain the same. So if you would have had to buy a car for your beloved but expensive children, why not do it tax efficiently.

At Nunn Hayward we can guide you through the purchase of the cars to reduce your tax liability / increase tax allowances to suit your own particular circumstances.


If you have any queries or feedback on the above article, please do not hesitate to contact Steve Cook, Tax Partner on 01753 888211 or steve@nunn-hayward.com

STOP PRESS

In December 2005, the current BACS electronic fund transfer and payments system will be switched off. By this time you should have renewed your existing systems to BACSTEL-IP if you wish to continue using automated payments such as Direct Debit for payment of employees’ salaries. If you don’t take action you will have to use cash/cheques in January.

The BACSTEL-IP upgrade is a simple process. You need to contact your Bank and Software provider who will advise you of the necessary steps to take. You can find out more at the BACSTEL-IP website www.bacstel-ip.com

Please contact us to discuss the above further

Tel: 01753 888211 Fax: 01753 889669 Email: abacus@nunn-hayward.com
Nunn Hayward, Sterling House, 20 Station Road, Gerrards Cross, Bucks SL9 8EL.

© 2005 Nunn Hayward. All rights reserved