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Author: Sophie Soraf

Use your will to save inheritance tax

Posted on by Sophie Soraf

The question of how to structure your will is a complex one involving consideration of a range of different factors.  Married couples with significant assets should consider the option of using an appropriate will trust on first death due to the tax planning opportunities available.

What is the inheritance tax nil rate band?

The inheritance tax “nil rate band” is the threshold below which no inheritance tax is payable. In recent years the nil rate band rules have become ever more complex with the introduction of three new elements alongside the standard nil rate band; they are:

  • transferable nil rate band
  • residence nil rate band
  • downsizing relief.

The complexity and quirks of the legislation offer many opportunities to save inheritance tax through (amongst other things) an appropriately structured will.

Please note: references to spouses and married couples include civil partners and it’s   assumed that all the persons in the examples are UK domiciled. Depending on your circumstances there may be other tax and/or legal issues to consider so it’s always important to take advice.

Married couples where one or both of the couple have previously been widowed

Married couples where one or both of the couple have previously been widowed may be able to save significant inheritance tax by maximising their ability to transfer the unused nil rate bands of their late spouses (known as the “transferable nil rate band”).

Example 1:

Bob and Mavis, a married couple, have both previously been widowed. Bob’s late wife, Gill, died in 2008 and Mavis’s late husband, Jim, died in 2009. Both Gill and Jim left their estates to their respective surviving spouses.

Bob and Mavis each have assets worth £650,000 (which they own separately). Unusually, they do not own and have never owned their own homes (so residence nil rate band does not apply to them, more on which below).

They would like the survivor of them to inherit the assets of the first to die and on the second death for the total estate to be divided equally between Bob’s son and Mavis’ daughter. In the circumstances the full standard nil rate band applies to both of them and to their late spouses’ estates.

Bob dies in 2019 and leaves his entire estate to Mavis. Mavis dies in 2021, leaving everything to her daughter and Bob’s son in equal shares. For simplicity, assume no changes in asset values between their deaths.

The inheritance tax position: On Bob’s death there will be no liability for inheritance tax because of the spouse exemption. On Mavis’ death her executors will be able to use her nil rate band (£325,000) and claim a transferable nil rate band (also £325,000). However, even though she has now been widowed twice, she can only claim one transferable nil rate band.

Therefore, the  inheritance tax liability on Mavis’ death will be £1.3 million – £650,000 x 40% = £260,000.

Example 2:

The facts are the same as in Example 1, except that Bob and Mavis make wills leaving the available nil rate band of the first to die and any transferable nil rate band from that person’s late spouse to a nil rate band discretionary trust.

On Bob’s death his entire estate (£650,000) will pass to the nil rate band trust. Mavis is included as a beneficiary of the trust so can benefit from funds if required at the discretion of the trustees. There is no inheritance tax liability on Bob’s death because of the nil rate band and transferable nil rate band available to his estate (his own nil rate band and the transferable nil rate band from his late wife, Gill.)

On Mavis’s death her estate of £650,000 will also be free from inheritance tax because her executors can claim her own nil rate band and the transferable nil rate band from her late husband, Jim. Hence there would be no inheritance tax on the death of either Bob or Mavis.

Mavis’s estate is left to the two children and the trustees of the discretionary trust could then decide to wind up that trust and appoint the assets to the two children.

Please note: There would be a small inheritance tax charge on the discretionary trust, which will vary depending on how long the trust runs for. In the example, if the trust was wound up shortly after Mavis’s death this charge would be approximately £4000. This would still mean an overall inheritance tax saving of approximately £256,000!

It should also be noted that this approach could have saved significant tax even if only one of them had previously been widowed (whichever one of them died first).

It is also the case that there are other reasons why the first of them to die might want to leave some or all of their assets to some form of will trust, e.g. to protect the intended inheritance of their own child. These issues are not considered here for simplicity but you can contact us to discuss any of these issues.

Standard nil rate band has been frozen until at least April 2026

The amount of the standard nil rate band has been frozen at its current level (£325,000) since 6 April 2009 and the government has announced that it will remain at that level until at least 5 April 2026.

Many married couples do not use the nil rate band on the death of the first of them to die, taking advantage of the transferable nil rate band. However, the freezing of the nil rate band means that the benefit of the transferable nil rate band can often be eroded by inflation. A nil rate band trust can avoid this erosion so could save tax on second death (assuming the nil rate band does not increase significantly in future).

Example 3:

Tony dies in 2021 leaving his entire estate to his wife, Georgina. This includes an investment portfolio worth £325,000 (which Tony was advised had strong growth potential). Neither of them has previously been widowed and their full nil rate bands of £325,000 are available.

Georgina dies in 2025 leaving a chargeable estate of £1.5 million, which is inherited by their children. This includes the investment portfolio she inherited from Tony, which is now worth £425,000.

While the investment portfolio has grown by £100,000 since Tony’s death (and so will increase the inheritance tax charge on Georgina’s death), the nil rate band remains unchanged.

Example 4:

The facts are as per Example 3 except that Tony leaves a nil rate band discretionary trust in his will. After his death the decision is taken to fund the trust by transferring the investment portfolio to it. Under the terms of the trust, Georgina can benefit if required at the discretion of the trustees. The portfolio is left in the trust.

The £100,000 growth on the investment portfolio is now held in the trust and is outside of Georgina’s estate for inheritance tax. This will achieve an inheritance tax saving of £40,000 compare to example 3. There would be some capital gains tax issues to consider.

Clawback rules

In 2017 the Government introduced an additional nil rate band for people who leave an interest in their home to certain qualifying beneficiaries (including children). This is known as the residence nil rate band. The rules for residence nil rate band are very complex so specialist advice should always be taken.

One point to note is that the residence nil rate band starts to be clawed back once your estate exceeds £2 million. The clawback rules are very complicated, but will eliminate residence nil rate band altogether, once the estate reaches a maximum of £2.7 million (depending on your circumstances, residence nil rate band could be eliminated before that level). Assets that qualify for business property relief or agricultural property relief are included when working out whether clawback applies.

Some married couples can reduce or even eliminate the impact of the clawback by using a nil rate band discretionary trust.

Example 5:

Martha and Henry are married and have a combined estate of £2.7 million, divided equally between them. Neither of them has previously been widowed and both have their full nil rate band of £325,000 available. Their estate includes their home worth £900,000. On Marta’s death in 2018 she leaves her entire estate to Henry. Henry dies in 2021, leaving his estate to their two children.

Because Henry’s estate (including the assets inherited from Martha) is at the maximum clawback threshold, no residence nil rate band applies.

Example 6:

The facts are the same as example 5 except that Marta leaves her available nil rate band to a discretionary trust. Henry’s estate is now worth £2.375 million, meaning that only a partial clawback of the  residence nil rate band applies. Henry’s executors will be able to claim a residence nil rate band of £187,500, saving inheritance tax of £75,000.

Please note: The impact of the residence nil rate band clawback rules will become more widely felt over the next few years following the government’s decision to freeze the clawback threshold at £2 million until at least 6 April 2026. Many estates will become subject to a full or partial reduction in the residence nil rate band assuming asset values rise in the interim. Again, a nil rate band discretionary trust can mitigate this in appropriate circumstances by keeping down the value of the survivor’s estate.

Downsizing relief

Residence nil rate band may not be available (or fully available) where you sell your home. A common example is where elderly clients sell their home and leave the property market altogether or downsize late in life to funds care needs.

Where you sell your home or downsize on or after 8 July 2015, there is an alternative relief called downsizing relief which may be available instead of or alongside any remaining residence nil rate band. However, the rules for this are extremely complex and you should take advice to make sure it will be available. The £2million clawback threshold mentioned above, also applies to any downsizing relief so, again, there are opportunities to reduce or eliminate the impact of clawback in appropriate cases.

Impact of equity release on nil rate band

Decisions about equity release or other borrowing secured on your home can impact on the amount of residence nil rate band available. It’s important to take both legal and wealth management advice when making decisions about your home, where your estate is or may be subject to inheritance tax.

Will trusts can help you protect your loved ones

Posted on by Sophie Soraf

Trusts often get bad press, being portrayed by some as vehicles to help the super-rich to avoid tax. While trusts can legitimately save tax for many people (most of whom are not super-rich!) their purpose is often to protect the position of loved ones.

Making a will involves consideration of many different factors and you should always consider, not only who you would like to benefit but how they should benefit. While the simplicity of outright giving will be appropriate in some circumstances, there are situations in which it may be more appropriate to protect the beneficiaries with some form of will trust.

What is a will trust?

A will trust can be thought of as a gift ‘with rules attached’. If you leave your assets to someone absolutely, you give total benefit and control of the assets given to them. They will own the assets and have the right to do with them as they wish. In contrast, where you leave assets to a will trust, you transfer ownership to trustees, who are charged with managing the assets for the benefit of beneficiaries. The will sets out who the trustees and beneficiaries are and the rules the trustees have to follow.

Some will trusts can be very simple, for example, if you leave assets to your trustees to hold for the benefit of your child when they reach age 18. It’s also possible to create more flexible trusts that give trustees discretion to decide who should benefit from capital or income and when that should be. You can also give different beneficiaries different rights, for example giving one person the right to benefit from the income generated by an asset, or to occupy a property for a set period, and giving other beneficiaries the benefit of the asset at the end of that period.

When you die, you give away all the assets in your estate under the terms of your will (assuming you make one, which you should!). For many people, this involves a significant transfer of wealth. It’s a good idea to consider whether you’re comfortable transferring that wealth absolutely or if you would prefer to use a trust.

Who are the trustees and what do they do?

The role of a trustee is to manage the assets in the trust and to exercise any discretions they are given. Depending on the wording of the trust, beneficiaries can act as trustees. You could also appoint outsiders such as trusted family members or friends or professional trustees.

The role of trustee is very important, and (as the name suggests) you should certainly choose people you trust! It is always sensible to take professional advice on the options and the factors to consider when deciding who to appoint.

You choose the initial trustees of a will trust under the terms of your will. You can either appoint the executors named in your will or separate trustees.

How does a will trust protect my family?

There are many different forms of will trust for different purposes. The protections offered and tax consequences will depend on the type of will trust chosen and you should always take professional advice on the different options.

Here are some of the many situations where an appropriately worded ill trust can protect your beneficiaries:

Where there is more than one family

If you, or your partner, have been married before or have children from a previous relationship, you might be concerned to ensure that your assets ultimately pass to your own children or family, while also looking after your spouse, if they survive you. A will trust can help to achieve this.

Where the surviving spouse may remarry or form a new relationship

Many people worry that if they leave their assets to their surviving spouse, their children may not inherit if the survivor remarries or forms a new relationship. Even if the survivor does not give away or leave the assets to their new partner, problems can still arise. For example, the new spouse might have a claim on assets if the new marriage ends in divorce, or they might make a claim for financial provision from the estate of the surviving spouse. Again, a will trust can reduce the risk of such problems.

Where the intended beneficiaries may be at financial risk

There are many situations where wealth left to a beneficiary may not end up going where intended, or may do them more harm than good, for example:

where the beneficiary is getting divorced or going through marital difficulties, there’s a risk that the inheritance may be included or taken into account in any divorce settlement.
where the beneficiary (or their partner) is immature, reckless, bad with money or at higher than usual risk of bankruptcy (for instance if they are engaged in risky business enterprises).
For young or otherwise vulnerable beneficiaries.

A will trust can reduce the risk of such problems arising.

Where an inheritance might affect the beneficiaries’ means tested benefits

Will trusts can often prevent the loss of a beneficiary’s means tested benefits, or reduce the impact of the inheritance on the benefits available.

Where an inheritance might complicate the beneficiaries’ tax position

An outright inheritance might complicate the beneficiary’s tax affairs if, for instance, they pay income tax at a high rate or their estate will be liable to inheritance tax on their death. While this is a complex area, the flexibility of will trusts can alleviate such problems, giving scope for some of the wealth to be used in a more tax efficient manner. For example, a child with significant wealth might prefer some of the trust funds to be used for their own children instead of them. A will trust can give the flexibility to focus the estate in the most tax efficient manner, depending on the circumstances at the time.

Where substantial wealth is involved

Substantial wealth (particularly when acquired suddenly) can cause its own problems. For example, it can affect a beneficiary’s outlook on life or the attitudes of those around them or increase their tax exposure. So it’s sensible to consider using a trust when passing down substantial wealth, even where the beneficiaries do not otherwise seem in need of protection.

How are will trusts taxed?

There are important tax issues to consider with will trusts including capital gains tax and income tax.  The rules are extremely complex so it’s vital that you get specialist tax advice.

Will trust case studies

We’ve set out a couple of illustrative case studies of situations where a will trust might be useful.

Will trust case study 1

Gill, aged 70, has an estate worth £800,000 including her home (which is in her sole name), which she occupies with her second husband, Brian. She has two adult children (Simon and) Beth) from her first marriage, which ended in divorce. Brian does not have significant assets and is largely dependent on Gill. Brian also has two children from a previous relationship.

Gill would like to look after Brian if he survives her, but also wants to make sure that her assets pass to her children, after his death.

If Gill leaves the assets outright to Brian, then he will decide what to do with them during the rest of his lifetime and who to leave them to after his death. If Gill is uncomfortable with this, then she could use a will trust to control what happens to her estate after her death.

Will trust case study 2

Jake is a widower with an estate worth approximately £ 5 million. He wants to provide for his three adult children, Karen, John and Steven and their children after his death. However, he knows that Karen’s marriage is in difficulty and Steven has had money problems in the past. John has a significant wealth of his own and has mentioned that a large inheritance might cause tax problems.

Again, a will trust could be used to protect the shares of Karen and Steven and give flexibility for John’s children to receive some of the trust fund instead of John, if this is more tax efficient.

Use your will to protect your business from inheritance tax

Posted on by Sophie Soraf

People with assets that qualify for business property relief (BPR) or agricultural property relief (APR) can often save significant amounts of inheritance tax with appropriately structured wills.

BPR and APR offer valuable inheritance tax relief for qualifying assets. In some cases, only one of the reliefs applies; in others, both may be available. What is less widely known is that the structure of your will can have a major impact on the total relief available and the inheritance tax due on your death.

What is business property relief?

Business property relief applies to “relevant business property” and can, depending on the circumstances, reduce its inheritance tax value by up to 100%. The criteria are complex, so professional advice is essential to determine eligibility and to structure your interests to maximise the relief.

What is agricultural property relief?

Agricultural property relief applies to “agricultural property”. Like BPR, it can reduce the inheritance tax value by up to 100%, but the conditions for relief are different. Again, professional advice is strongly recommended.

Clients with qualifying assets, such as a business or a farm, should also consider the risk that these reliefs may be withdrawn or limited in future due to legal changes or a change in personal circumstances. The current regime is relatively generous by historical standards, but this may not always be the case.

Using Discretionary Will Trust to maximise reliefs

An appropriately structured will can help preserve available reliefs and create opportunities to maximise them. For example, clients with relievable assets can protect those assets by placing them into a discretionary will trust.

This approach is often especially beneficial for married couples. Assets left to a UK-domiciled spouse are already exempt from inheritance tax due to the spouse exemption. However, this also means that any additional reliefs (like BPR or APR) are effectively wasted if those assets are left outright to the spouse. Using a discretionary trust can avoid this issue and also enable further inheritance tax planning.

A discretionary will trust allows trustees to decide how and when to distribute assets to a class of beneficiaries, which may include the surviving spouse. The spouse can also act as a trustee and may still benefit from the trust at the discretion of the trustees. Because the assets are held within the trust rather than the spouse’s estate, they do not form part of their taxable estate. While trusts can be subject to inheritance tax charges (typically lower than personal estate charges), the overall tax savings can be substantial.

Preserving reliefs

Using a discretionary will trust on the first death can preserve valuable reliefs that might otherwise be lost if circumstances change before the second death – for example, if assets are sold or if the relief rules are altered.

Example 1: No trust – relief lost
Margery and Jake own a successful furniture business equally. When Margery dies in 2012, she leaves her £1 million shareholding (qualifying for 100% BPR) to Jake. Jake later sells the business. At his death in 2021, the proceeds (now worth £1.5 million) are held in an investment portfolio, with no BPR available. His estate is subject to inheritance tax of £600,000 on these assets.

Example 2: Discretionary trust – relief preserved
Margery instead leaves her business shares to a discretionary trust, naming Jake and their sons Ben and Nigel as trustees. After Jake’s death, the trust assets (now an investment portfolio) are distributed to Ben and Nigel and their children. There is no inheritance tax on Jake’s death in relation to the portfolio, and while the trust may incur a smaller charge, a significant tax saving is achieved.

Maximising relief on the family home

The residence nil rate band (RNRB) is an additional inheritance tax relief when the home is passed to direct descendants. However, it begins to taper when an estate exceeds £2 million—including assets qualifying for BPR or APR.

A well-drafted will using a trust can reduce or eliminate this taper.

Example 3: No trust – RNRB lost
Richard owns a business (worth £2 million, qualifying for BPR) and other assets worth £800,000. Clare, his wife, has assets worth £400,000. They own a £600,000 home jointly. Richard leaves everything to Clare in 2016. When Clare dies in 2021, her estate exceeds £2 million, so no RNRB is available.

Example 4: Discretionary trust – RNRB preserved
If Richard had left the business shares to a discretionary trust and the rest to Clare, her estate on death would be worth £1.5 million (assuming £300,000 growth). This is below the taper threshold, so RNRB and transferable RNRB from Richard would apply—saving £140,000 in tax.

Planning opportunities after the first death

The right will structure can also allow further planning opportunities after the first death.

Example 5: No trust – Relief not reused
Paul and Jenny, in a farming partnership with their daughter Gill, have a joint estate of £7 million—£4 million of which qualifies for BPR and APR. Paul dies in 2015, leaving everything to Jenny. She later leaves the farm to Gill and other assets to Karen. The inheritance tax on Jenny’s death is £940,000.

Example 6: Trust structure – Relief reused
If Paul had left the relievable assets to a discretionary trust and the rest to a life interest trust for Jenny, the trustees could have transferred £1 million in relievable assets from the life interest trust to the discretionary trust shortly after his death.

Provided Jenny survives this transfer by two years, the reliefs apply again on her death, reducing her estate’s liability to £540,000—a saving of £400,000.

Complex tax and legal issues

Trusts are subject to potential inheritance tax charges at ten-year intervals and on termination. Some transactions may also trigger capital gains tax and stamp duty, which must be weighed against the potential tax savings. Income tax implications may also arise.

Moreover, using a discretionary trust requires confidence in your chosen trustees, as they control how and when assets are distributed. You must be comfortable with not leaving assets outright to beneficiaries.

This is a complex area of law, and expert advice is essential. However, with the right planning, significant tax savings can be achieved.

Do I need to register my Trust with HMRC?

Posted on by Sophie Soraf

Changes to the law have significantly expanded the scope of trusts that need to be registered on the HMRC Trust Register. Trusts affected by the new changes must register with TRS by 1 September 2022.

Following the Fourth Money Laundering Directive, a Register of Trusts, maintained by HMRC was introduced, which is known as the Trust Registration Service or “TRS”. This imposed requirements on various trusts, including requirements to provide certain details about the trust for inclusion on the Trust Register and to keep those details up to date. The information to be provided includes details of the trustees and certain beneficiaries and certain information about trust assets.

The rules as to which trusts were required to register with the TRS are complex but, broadly, registration is generally required (with certain exceptions) where the trust has a liability to UK tax.

As a result of the Fifth Money Laundering Directive, the scope of trusts that need to register with TRS has been significantly expanded and now includes most UK trusts (even if they don’t pay UK tax) and non-UK trusts with certain UK connections. There are some exceptions, but these are limited. Trusts affected by the new requirements must register with TRS by 1 September 2022.

It should be noted that the definition of a “trust” for the purposes of these requirements is very wide: for example, the registration requirements apply to most fixed trusts (trusts fixed for the absolute benefit of certain individuals) and to properties where not all the beneficial owners are registered as owners at the Land Registry (subject to certain exemptions).

Example:
Cathy’s late husband, Derek, died in 2001. In his Will he left a gift of his available Inheritance Tax “nil rate band” to a discretionary trust and the rest of his estate to Cathy. The trust, which is still in existence, was funded by a charge over Cathy and Derek’s home. No income has been generated from the trust fund and the trust has never triggered any liability to UK tax.

The trust is now required to register with TRS and should do so by 1 September 2022.

Financial and other penalties may be applied against trustees who fail to register on time, and, in extreme cases, criminal sanctions may apply.

Further information about the trust registration requirements can be found on the gov.uk website.

What should I do?
Trustees of trusts not already registered with TRS should review the new rules and consider whether they need to register.

If you would like us to advise you on the new rules or assist with registration of the trust, please contact our Trust Team on the details shown below.

Call our specialist solicitors on 0800 013  1165

Capital Gains Tax on property

Posted on by Sophie Soraf

Latest update following the budget announcement

In the Autumn Budget 2021 the chancellor avoided making increases to capital gains tax on property.

Instead he offered some good news by extending the reporting and payment deadline for UK residents disposing of UK residential property that results in a CGT liability. You now have 60 days from completion of the disposal to deliver a CGT return and pay any tax due. The deadline has also been extended to 60 days for non-UK residents required to report a direct or indirect disposal of UK land and make a payment of tax.

The change takes effect for disposals that completed on or after 27 October 2021.

What is Capital Gains Tax?

Capital Gains Tax (CGT) is a tax on the profit you make when you sell or ‘dispose of’ an asset that has increased in value since you purchased it. To clarify, you are not taxed on the full amount you make from the sale, only the profit or ‘gain’.

What does it mean to ‘dispose of’ an asset?
Disposing of an asset refers to more than just selling it, and can include:

Gifting or transferring it to somebody else
Exchanging it for another asset
Receiving compensation (e.g. an insurance payout) due to the loss or damage of the asset.

If you are organising your finances, it can be a good idea to talk things through with a wealth management expert. Tees has independent financial advisers you can ask for advice.
When do I have to pay Capital Gains Tax on the property?
You will usually be taxed on the sale of a property if it is a second home or buy-to-let property, or if you have let out part of your main residence. CGT also applies to the sale of commercial premises, land and inherited property. Certain costs, such as legal and estate agency fees, stamp duty or surveying costs, are deductible when calculating your ‘gain’.

However, under most circumstances, you won’t usually be taxed on the sale of your main home due to a tax relief called Private Residence Relief (PRR).

Call our specialist solicitors on 0808 231 1320

What is Private Residence Relief and how do I know if I qualify?
PRR will exempt the gain from CGT when you’re selling a home you have lived in as your main residence for the entire period of ownership. You must meet this and all other PRR criteria to be eligible for the relief. There are a number of scenarios that may limit your entitlement to PRR, including;

Letting out all or part of your main residence (not including having a lodger who shares the house with you)
Using part of your main residence for business purposes only
Generally, the grounds must not exceed 5,000 square metres
You must not have bought the property simply to sell it on for profit.
What are the Capital Gains Tax rules for second homeowners, and what has changed?
People selling a second home or buy-to-let property must pay CGT on any profit they make from the sale after the deduction of any allowable expenses and allowances. The taxable gain is treated as the “top slice” of your income and basic rate taxpayers will be taxed at a rate of 18%, while higher and additional rate taxpayers will be taxed at 28%. As the gain is the top slice of your income it is possible for some of the gain to be taxed at 18% with the rest a 28%.

From 6 April 2020, UK residents selling a home that is not their main residence will have 30 calendar days from the date of completion to notify HMRC of the gain on a new CGT return and pay any CGT owed. This is a significant shortening of the previous deadline; those selling a property liable to CGT prior to the start of the 2020 tax year had until the self-assessment tax return deadline of 31 January following the end of the tax year of sale to notify HMRC and pay any tax due. To highlight the magnitude of the change, taxpayers could have had up to 22 months to make their payment under the old system against just one month now.

As an example, if a property was sold on 5 April 2020, the taxpayer wouldn’t need to notify HMRC and pay CGT until the date their 2019/20 tax return was due, i.e. 31 January 2021. However, if that same property was sold on 6 April 2020, the taxpayer would only have until 6 May 2020 to complete the necessary paperwork and make their payment – a reduction of nearly nine months.

What changes have there been to Private Residence Relief?
There are special rules governing the sale of a home the taxpayer has not always lived in. In circumstances such as these, you may not qualify for full Private Residence Relief, but there may be certain periods that will qualify.

Prior to the 2020/21 tax year, provided the property had been your home at some point in your period of ownership the last 18 months before the property is sold were always eligible for the relief (whether or not the property was your main residence at that time). For sales on or after 6 April 2020, however, this relief period reduced to nine months. For people purchasing a home prior to selling their old one, this effectively halves the grace period within which you can live in your new property without paying CGT on your former home. In practice, this means taxpayers must ensure their old property is sold within nine months to avoid a potential CGT charge. This final period is extended to 36 months in certain limited circumstances, most typically where the taxpayer moves directly from the property in to a care home.

You may also get relief for any periods of absence adding up to three years, or four years if you had to live away from home in the UK for work. You’ll get relief for any period of time you were living outside of the UK for work. You must have lived in your home before and after your absence to qualify, unless work prevented you from doing so.

What about Lettings Relief?
Another important change from 6 April 2020 is the loss of lettings relief in all but extremely limited circumstances. Where a taxpayer previously qualified, this relief previously exempted up to a maximum of £40,000 of a gain from CGT in instances where a former main residence had been subsequently let out. The loss of this relief could cost some taxpayers up to an additional £11,200 in tax. Unfortunately this previously generous relief is now unavailable in most circumstances.

What qualifies as my ‘main residence’ for Capital Gains Tax purposes?
What makes a main residence is a complicated issue in tax law, very simply put it is your home. Home is of course, much, much more than simply where you live and will be relatively easy to identify in most circumstances.

If you own more than one home, you are able to nominate which property you would like to be your main, tax-free residence. This doesn’t have to be the one you live in all, or even most, of the time. You may wish to nominate the property you expect to make the most profit on when you sell it. Once you have purchased a second home, you have two years within which to nominate your main, tax-free residence.

It should be noted that if you are married or in a civil partnership, you can only nominate one property between you.

What will I need to do?
If you sell a UK residential property and a chargeable gain arises you’ll need to report the gain to HMRC on a CGT return and pay the tax within 30 days of completion. HMRC will issue penalties and charge interest if you needed to report a gain/pay tax and failed to do so.

With such a tight deadline, you’ll need to make preparations in advance to ensure compliance with the new 30-day deadline. Unless you are classed under certain categories for whom the use of digital technology cannot reasonably be expected, you are expected to make your CGT return and payment online via HMRC’s government gateway. If you don’t have a government gateway account, you’ll need to apply for one – a process which can take up to 10 working days, so this will need to be factored in. You’ll also need certain details to hand to fill in the required paperwork – these should also be gathered in advance to prevent delays and any potential penalties. The information you’ll need includes:

The date the property was acquired
Costs of purchase and disposal e.g. purchase price, legal, surveying or estate agency fees (these can normally be found on the completion statement from your solicitor)
Costs of eligible home improvements
Earnings in the applicable tax year.
To calculate your taxable gain you will need to deduct the allowable costs (be careful, not all costs are allowable) from the sale proceeds. You can then deduct any allowances calculated such as PRR. Finally, if you haven’t already used it, you can deduct your annual CGT tax-free allowance of £12,300 (2020/21).

It is this “taxable gain” that will be added to your estimated income in order to calculate the tax payable. You’ll pay CGT of 18%, 28% or a combination of the two on the remainder, depending on your tax band.

If you complete a tax return you will also need to include details of the disposal on the return as normal, paying any tax adjustment through self-assessment as normal.

Tees has a dedicated team of tax accountants that can assist you with your rental and capital gains tax reporting requirements. Please do not hesitate to contact us if you would like assistance with your tax reporting obligations.

Do I have to sell my home to pay for care?

Posted on by Sophie Soraf

The Government’s proposed reforms to health and social care will still leave many people having to pay large amounts in care home fees. However, these costs can often be reduced or even avoided altogether with appropriate planning. This article looks at the rules in England; the rules in different parts of the UK may be different.

The government has announced proposals to change the rules around how much people have to contribute towards care costs and at what stage, funded by a proposed new Health and Social Care Levy.

What are the proposed changes to health and social care funding?

If you need local authority care, the means testing rules are applied to decide how much you must pay towards the care; currently the rules are as follows:

  • if your capital is above £23,250 (the “upper limit”) you have to pay the care fees in full
  • you do not have to make a capital contribution to care costs where your capital is less than £14,250 (the “lower limit”) – although you may still have to contribute from your income
  • between £14,250 and £23,250 you have to make a partial capital contribution (as well as an income contribution, where appropriate)
  • there is no cap on the maximum care costs you may have to pay over the course of your lifetime.

Under the new proposals:

  • the lower and upper limits will be increased to £20,000 and £100,000 respectively from October 2023. This means that anyone with capital of less than £100,000 may receive some support towards their care costs (albeit limited) and those with capital of less than £20,000 will not have to make a capital contribution (although may still have to make a contribution from their income)
  • a lifetime cap of £86,000 on care costs will be introduced from October 2023. This means that you should not have to contribute more than that amount towards your care costs (although the cap isn’t being backdated).

However, it’s important to note that the cap only applies to the cost of actual care and not to other costs such as accommodation, energy, food or water. These costs, particularly the costs of accommodation, can often far outweigh the costs of care, so many people will still face the prospect of very large care bills which will erode their families’ inheritance.

Will I lose my home if I need to pay for care?

The value of your home is included in the assessment of what capital you possess, for means testing in many circumstances. For example, it will be included in the assessment where you no longer occupy your home (e.g. if you are moving into residential care permanently) and none of the other exemptions applies. This may lead to your home having to be sold to fund care fees.

It may be possible to avoid selling your home during your lifetime by entering into a deferred payment arrangement (broadly whereby the fees are repaid from sale of the home after your death). However, interest and fees apply and such arrangements will still reduce your families’ inheritance.

Example where home inherited absolutely

John and Betty jointly own their home, worth £300,000, free of mortgage. They have owned it equally as joint tenants (see below) since acquiring it. The home is their only major asset. No-one else occupies it apart from them.

On John’s death in November 2023, his share in the home passes to Betty as the surviving joint tenant. Unfortunately, Betty’s health declines rapidly after John’s death and she has to move into permanent residential care 12 months later.

The entire value of the home will be included in the means assessment for Betty. Her capital will be above the £100,000 threshold, meaning that she will be liable to pay the fees in full without any local authority funding. The amount she has to pay for care will be capped at £86,000, however her other costs (e.g. accommodation, energy and food) will not be capped.

Can I avoid paying care home fees by making a lifetime gift?

Some people might consider giving their home away during their lifetime to try to get it outside the scope of the means testing rules. There are rules aimed at preventing people from doing this known as the “deprivation of assets” rules. Where these rules apply, the local authority can include the value of the gifted asset when they carry out the means assessment. The “deprivation of assets” rules are complex and specialist legal advice should always be taken on whether or not they will apply.

Those considering gifting their home must also consider the possible significant impact of the gift on their future financial security and independence. With careful drafting of the document, a trust can address some of these concerns. However, the deprivation of assets rules can still apply.

The tax consequences of a gift (whether outright or to trust) must also be carefully considered. Such a gift can in some circumstances trigger immediate tax charges and/or increase your future tax exposure and/or that of your estate. You should always take professional advice before deciding to give away your home or a share in it, both as to whether the gift will achieve the intended objectives and what the legal and tax consequences will be.

Can I use my Will to protect my home from being sold to pay care home fees?

For married couples who do not wish to give away their home, one alternative is to leave the share in the home of the first spouse to die, to an appropriately worded trust under their Wills. While this won’t offer full protection, it will, in many circumstances, significantly reduce (and sometimes eliminate) the exposure to means assessment. Meanwhile, provided the trust is worded appropriately, the survivor can continue to occupy the property for the remainder of their life.

For the trust to work, the couple will need to hold the property as “tenants in common”, rather than as “joint tenants”. Where joint owners hold a property as joint tenants this means that the share in the property of the first to die automatically passes to the survivor. If they hold the property as tenants in common, each joint owner’s share passes under their respective Wills. Where a property is owned as joint tenants, it’s simple for a legal specialist to convert this to a tenancy in common, but you need to get it organised before the first death.

Example where share of home left to appropriate Will trust

The facts are the same as in the previous example above, except that John and Betty convert their ownership of the property, so they hold it as “tenants in common” in equal shares and John leaves his half share in the home to a trust under his Will. Under the terms of the trust, Betty has the right to occupy the home rent free for the rest of her life and John’s half share passes to their children after Betty’s death.

When Betty goes into care, her assets for means assessment purposes will include her own share of the home, but not the share held in John’s Will trust (because that doesn’t belong to her). Hence the share in the Will trust will be protected for the children. Also, the value of Betty’s share of the home for means assessment, is likely to be significantly lower than 50% of the total property value, because it’s the market value of the share that is assessed. The market value of a half share is likely to be much lower than 50% of the whole value, because a half share on its own will be much less marketable.

The Will trust approach also avoids many of the potential downsides of a lifetime trust. The deprivation of assets rules will not generally apply assuming (as will often be the case) that there has been no reduction in the value of anyone’s estate. The trust can be worded in such a way that the inheritance tax and capital gains tax consequences will be broadly similar to those that would apply if the property had been left outright. However, careful drafting and implementation is needed, or the tax consequences could be different. Before the death of the first spouse to die, the trust has no effect, so you can deal with the property as you wish.

One relevant consideration is that, by using a Will trust, the survivor will not be entitled to the capital of the share of the first to die. This will deter people who want absolute control over the home after the first death. Ways to mitigate this include:

  • the trust can include powers to advance capital at the discretion of the trustees if desired
  • the survivor can be appointed as one of the trustees so that they are involved in decisions while they have capacity
  • the terms of the trust can also give the survivor the right to require the trustees to join in the sale and purchase of a replacement property if they wish to move.

Please be aware that the Will trust route will not provide protection if both spouses have to go into care during their joint lifetimes (because the trust does not apply until first death). However, if only one spouse has to go into care during their joint lifetimes, the home would not generally be taken into account for means assessment, provided the other spouse is still living there.

Can I use a Deed of Variation to protect my home from care home fees?

You may have heard that beneficiaries of a Will can vary the terms of the Will (or the destination of a property inherited as surviving joint tenant) within two years of death, by making a Deed of Variation. However, Deeds of Variation can be subject to the “deprivation of assets” rules. So, if you decide to change your Wills, it’s better to do so during your joint lifetimes rather than relying on Deeds of Variation.

Ensuring your business is protected during uncertain times

Posted on by Sophie Soraf

Businesses across many different sectors are slowly getting back on their feet as the economy continues to improve following the pandemic. This crisis has shown that in times of great challenge, your employees – their skills, knowledge and understanding of how your business ticks – are essential to keeping your business running.

So looking after your employees and your business go hand in hand. In a recent survey, 35% of businesses said one of the top three risks to their business would be an owner becoming critically ill and being unable to work. 52% said they would cease trading within one year were they to lose such a key person, and yet, surprisingly, only 18% had considered cover for the illness or death of a key person. (Source: Legal & General’s State of the Nation Report 2021). That’s very curious but the message of this article is: don’t be that business! There are two key groups of insurance that can help protect your business and employees from financial losses resulting from illness and death.

  • Policies that protect your business against financial losses resulting from the death or illness of a key staff member or business partner, and
  • Insurance that provides financial assistance to employees and their families in the event of their death or inability to work.

Protecting your business

When might I need shareholder/partnership protection insurance? 

Shareholder or partnership protection cover insures a business against the loss of a shareholder or key business partner, which would likely leave the remaining business owners in a precarious position. With limited companies or partnerships, the main risk is that the deceased owner’s share in the business will be passed on to a family member, who may have little interest in taking over their role.

Essentially, shareholder or partnership protection insurance is a life insurance policy that pays out to the surviving business owners, based on an agreement that they will use the money to purchase the deceased’s outstanding shares in the business.

The cover you take out will depend on your business structure: 

Shareholder protection is designed for limited companies, with the life insurance taken out on the lives of the company’s shareholders.

Partnership protection is designed for partnerships and limited liability partnerships, with the life insurance taken out on the lives of the business partners.

The policy might also include critical illness cover, in the event that a partner or shareholder does not wish to continue their involvement in running the business following their treatment or recovery from a serious illness.

Is key person insurance appropriate for my business?

Key person insurance protects businesses against the financial losses incurred if a ‘key’ employee becomes ill or dies while working for the company. This could be a CEO, business partner or senior employee considered essential to the successful running of the business. A payout from this kind of insurance can keep a business trading while recruiting for a replacement or undergoing reorganisation.

Some types of business insurance, such as employers’ liability, are legally required to run a business.  Key person insurance is not one of them, but the loss of a key employee could affect the business in many ways.

Clients may react negatively or lose confidence in the business, shareholder confidence could plummet, and the skill, knowledge and experience of the key employee may be difficult, or even impossible, to replace.

Particularly for small businesses, losing a director or head of department could result in the company’s collapse, which is why the financial assistance provided by key person insurance could prove to be a lifeline.

Protecting your employees

How do my employees benefit from death in service insurance?

Also known as relevant life assurance, death in service is a type of insurance that pays out a tax-free lump sum to an employee’s beneficiaries if they die whilst working for your company. They don’t have to be at work or performing a work-related activity to receive the benefit; they simply have to be on the payroll of your company when they die or are diagnosed with a terminal illness.

This type of insurance is the second most valued employment benefit after private medical insurance, as can help your employee’s beneficiaries with costs such as funeral arrangements and living expenses at a very difficult time. The lump sum paid out is usually between two and four times the employee’s basic salary.

How will group private medical insurance benefit my business? 

As mentioned above, group private medical insurance is one of the most popular employee benefits a business can offer, and provides your employees (and often their families) with access to private healthcare services.

While it is one of the more expensive employee benefits, private healthcare can offer immeasurable advantages –not only to your employees, but to you as a business. Employees will not be forced to take days off to access healthcare appointments, as private facilities usually offer appointments out of hours. They won’t face lengthy waits for appointments or treatment, so they can get better sooner and return to work more quickly.

The Coronavirus crisis has made us all too aware of the strain and pressure under which the NHS has been placed – there is now a huge backlog of patients waiting for treatments and routine surgical procedures. Offering your employees access to private healthcare is therefore a bigger draw than ever and could greatly help you to attract and retain the best talent.

Is permanent health insurance a good option to protect my employees?

Arranging permanent health insurance (or PHI) on behalf of your employees provides protection for them in the event of an injury or long-term illness that renders them unable to work.

PHI is another name for income protection insurance, but the premiums are paid by the business rather than the individual. The usual payout is between 50% and 75% of an employee’s full salary, potentially until they retire, and it can help your employees continue to pay for key outgoings such as mortgage and childcare costs until they are able to return to work. As such it is often considered by employees to be a more valuable benefit than private medical insurance.

The benefits usually start after a ‘waiting period’ of up to 52 weeks, typically after work-related sickness pay comes to an end.

The wording of PHI polices from different providers can vary greatly in terms of what exactly they cover, so it’s always best to check the fine print. As an employer, they can benefit you by incentivising your employee to return to work as soon as they are ready, in order to regain 100% of their salary.

What benefits your employees, benefits your business

Insuring your business and employees against financial loss, illness and death may be an added expense, but it could be the move that helps your business stay afloat during uncertain times. At Tees, we’re here to discuss your business insurance needs and advise you on which type of policy could deliver the greatest benefits to your organisation.

This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Tees is a trading name of Tees Financial Limited which is regulated and authorised by the Financial Conduct Authority. Registered number 211314.

Tees Financial Limited is registered in England and Wales. Registered number 4342506.

Advice to young farmers on taking over the family farm

Posted on by Sophie Soraf

If you’re a young farmer who is in line to inherit your family’s business, taking the farm successfully forward into the next generation can feel overwhelming.

In this guide, we provide you with an overview of the many ways you can prepare yourself to run the family business, embrace new methods of working and protect the farm both legally and financially.

Open up conversations about succession

While talking about money and inheritance can be uncomfortable, it’s important to open up these conversations early on so that everybody’s expectations and positions are clear. Succession planning is important for any family business, but broaching the idea within farming families can be particularly difficult, with the current business owner often reluctant to relinquish control to a successor.

According to a study, less than a fifth of farmers plan to ever fully retire, while only half of those with children have identified a successor. Indeed the UK Government recognises this as a problem, to the extent that it has set up a new scheme to pay older farmers to retire, enabling the younger generation to enter, bringing with them new farming methods and breathing new life into the business.

Even if the current owner of your family’s business has no plans to retire, it’s still important to plan for the unexpected and to ensure that the legal and financial framework has been put in place to enable you to take over the business in the event of their death.

If your parents are unwilling to enter into these types of conversations with you, our rural legal specialists can help you facilitate positive discussions by explaining the benefits of succession planning and assisting with essential aspects of estate planning such as drafting Wills, providing Inheritance Tax (IHT) advice, introducing the possibility of making lifetime gifts and placing life insurance benefits in trust.

Key succession planning questions

If you’re unsure of where to start, here are some good questions you can use to open up productive conversations around succession and the future of the family business.

  • What are your parents’ future plans? Do they plan to retire? If so, can you work with them and take on more responsibility so they are able to slow down in their later years? If not, is there another way for the two generations to satisfactorily work together in the long term?
  • Who will live where? Does the farm have a number of properties which can accommodate the family?  If so, try to have an open discussion with all family members about preferences for the future.
  • What training and skills development do you need to undertake in order to prepare for succession? Your parents may be nervous to hand over the farm if they do not believe you yet possess the skills to take the farm forward successfully.
  • It’s likely your parents will not want to split up the farm, so if you are in line to inherit, what provision will need to be made for your siblings, if you have any?
  • How will your family’s land and business assets be passed down with the minimum Inheritance Tax liability?
  • What role do you, your parents and your siblings want to play, now and in the future? Do your siblings want to be involved in the farm or are they happy for you to take it over? It’s important to nail the details down now to avoid conflict later down the line.

Draw up a partnership agreement

If the farm owner is not ready to retire, but you are still looking to take a more active role in the business in order to develop your knowledge and skills, you may wish to consider a Partnership Agreement.

Having a partnership agreement in place allows clarity regarding the ownership of business assets and enables families to clearly define the roles each partner will play in the day-to-day management of the farming business.  Holding assets within the partnership can sometimes also be a useful tax planning tool.

Our expertise is in helping farming families draft comprehensive partnership agreements, and to advise on any issues that may arise in the duration of the partnership (for example, helping to handle disputes, or managing change within the partnership, e.g. if one of the partners leaves the partnership or dies).

Consider diversifying

Whether they want to or not, many farming businesses are having to diversify and find new and sustainable sources of income to ensure the farm’s survival in the modern era. According to Defra, 66% of farms across the UK have already diversified in some form to provide farming families with the additional income they need and support the rural economy.

This may take the form of using unused outbuildings to set up farm shops or professional services spaces, hosting tourism accommodation, or setting aside land for recreational uses, such as horse riding or golf courses.

Funding a new venture is often expensive, which can prove a barrier to successful diversification. In addition to commercial loans and private finance, you may be able to access funding from initiatives such as the Rural Development Programme for England, which provides money for diversifications that will have a positive impact on the environment.

At Tees, we regularly advise farming families on a wide range of diversification projects, ensuring they meet any new legal and regulatory requirements to which they may become subject in the course of their new venture – for example, planning permission, or the acquisition of special licenses or certificates.

Get familiar with new post-Brexit funding

The EU system of grants and subsidies to British farmers is being phased out from this year and replaced with a new series of Environmental Land Management schemes that reward farming businesses for the provision of ‘public goods’, i.e. implementing more sustainable farming methods or working to restore habitats and the environment.

Understanding the types of initiatives rewarded by the new system will help you guide the business in the right direction and enable you and your family to more effectively plan for the future.

They include (but are by no means limited to):

  • Natural flood management measures
  • Restoring habitats and environments
  • Forest and woodland creation
  • Opening up public access to the countryside
  • Improving soil health
  • Improving air and water quality.

More information about the post-Brexit Environmental Land Management schemes can be found here. The gov.uk website also gives an overview of other grants and payments currently available to agricultural businesses.

Take specialist advice

For many young farmers, the thought of taking over the family farm is exciting, but overwhelming. But you don’t have to do it alone. Our agriculture and estates specialists offer legal and financial services across a broad spectrum of specialisms, including Wills, Trusts, Tax & Probate, Corporate, Commercial Property and Wealth Management.

We have been helping farming families successfully transfer their business from generation to generation for over a century. For advice on planning for your future, don’t hesitate to get in touch.

What is pension drawdown and how does it work?

Posted on by Sophie Soraf

Pension (or income) drawdown is one of the ways you can use your pension pot to provide a regular income when you reach retirement. Drawdown is a flexible way of accessing your pension, while allowing your pension fund to keep growing. Here, we explain exactly how drawdown works and whether it’s right for you.

Pension drawdown is available to those aged 55 or over (increasing to age 57 in 2028) and enables you to take an income from your pension pot while leaving your remaining pension savings invested.

You can choose to move your pension into drawdown in one go or a little at a time. You may be able to do this with your current provider or by transferring your pension to a drawdown provider elsewhere. If you decide to transfer, it’s important to first check you won’t lose any valuable benefits or be charged high exit fees.

Under rules introduced in April 2015, you can take up to 25% of your pension pot you use for drawdown as tax-free cash – you can take this in one go or each time you move part of your pension into drawdown. Further withdrawals can then be made as and when you choose, whether you do this in one go, take regular monthly payments, or withdraw lump sum payments as and when you need them.

Drawdown allowances and tax rules

The first 25% you take of your pension pot will be tax-free, while the remaining 75% will be subject to Income Tax. How much you pay will depend on your total income for the year and your tax rate. For 2020/21 this means:

  • if you have no other income, no tax will be due on the first £12,500
  • on income between £12,501 and £50,000 you’ll pay tax at 20%
  • on income between £50,0001 and £150,000 you’ll pay tax at 40%
  • on income over £150,000, you will pay tax at 45%.

What are the benefits of drawdown?

One of the biggest advantages to drawdown is the flexibility it offers. Not only does it enable you to take money from your pension savings whenever you need it, there’s no limit on the number of withdrawals you can make, and you can take out different sums each year.

At the same time, the remainder of your pension pot can stay invested which means if your investments perform well, your income could grow throughout retirement. Drawdown gives you the option of being able to choose your own investments, use ready-made portfolios or let an adviser choose on your behalf.

What are the downsides?

It’s important to understand that it’s your responsibility to ensure your retirement income lasts the duration of your retirement and to understand that the more you withdraw from your pension pot, the quicker it will be depleted. If you make withdrawals too frequently, your retirement income could run out earlier than expected.

Consider, too, that large withdrawals can push you into a higher tax band and, as soon as you withdraw more than your 25% tax-free lump sum, the Money Purchase Annual Allowance (MPAA) applies which limits the amount that be contributed to your pension to £4,000 per year.

Additionally, there’s no guarantee that your investments will continue to grow which means you could get back less than you invest.

Buying an annuity is still appropriate for many people in retirement as it allows you to use your pension savings to buy a guaranteed income that lasts the rest of your life. If you prefer, you can use part of your pension savings to buy an annuity and leave the remainder in drawdown.

How to manage drawdown funds during retirement

If you’re considering drawdown, it’s important to plan carefully, taking into account how long you need your pension to last – remember that your retirement could last 30 years or more. As part of this, you’ll need to consider what to do with any cash you withdraw over the short, medium and long-term:

Short-term: when still in employment, it’s advisable to keep three to six months’ worth of income in a current account or savings account that will give you instant access for covering emergency costs. Upon retirement, this should increase to one to three years’ worth of expenditure.

Medium-term: cash that’s not required in the immediate future could be tied up in a fixed term savings account as these tend to pay higher interest rates than you’ll get with an easy access account. In return, you must leave your funds untouched for the term of the account, which could be anywhere between six months and five years. As a general rule, the longer the term of the account, the higher the rate of interest. You could choose to lock some cash away in a shorter-term account, and another chunk in a longer-term one.

Long-term: investing can be a good option for any cash you won’t need to use for longer than five years. Investing in the stock market tends to give better returns than cash savings over the long-term but remember that your investments can fall in value as well as rise, so you should ensure you understand the risks involved first.

Key questions to consider

Before deciding whether pension drawdown is right for you, it’s worth asking yourself the following questions to ensure you fully understand your options:

  • How much of my pension do I want to move into drawdown?
  • Will I be charged an exit fee if I transfer my pension?
  • Am I comfortable managing my retirement income or would a guaranteed income be more suitable?
  • How regularly should I make withdrawals?
  • Am I comfortable with the investment risk and do I have other income to fall back on?

How we can help

Should you need help answering these questions, our expert pension advisers are on hand to discuss all your pension and retirement options. We take a holistic approach tailored to you, the individual, and will always make alternative suggestions if appropriate.

Our advisers will talk to you in jargon free language to help you understand your choices and our advice and recommendations will be focused on helping you to get the best possible result.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

 

This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Past performance is not a reliable indicator of future returns and all investments involve risks including the risk of possible loss of capital. Some information quoted was obtained from external sources we consider to be reliable.

Tees is a trading name of Tees Financial Limited which is authorised and regulated by the Financial Conduct Authority. Registered number 211314.

Tees Financial Limited is registered in England and Wales. Registered number 4342506.

Keeping gifts of money in the family

Posted on by Sophie Soraf

Increasing numbers of parents are helping their children onto the property ladder. Money will often come from your own hard-earned savings or from a family inheritance so you will understandably want to make sure that your financial investment stays within the family.

This article looks at options to assist your child’s property purchase and ways of reducing the risk of that assistance leaving the family.

What should I do when providing money to my child for a house purchase?

It is sensible to agree and document whether the money is intended as a gift or loan, or whether you are taking a share in the property. There is risk of complication if your child is buying jointly with their partner, for instance in the event of a future relationship breakdown. However, even if your child is buying alone, future complications can still arise. For example, if they later cohabit with a partner and the partner acquires an interest in the property or if there is a future dispute between you and your child.

Both you and your child should also consider making a Will or reviewing existing Wills and consider the basis on which the property will be held to ensure that the property interest and any rights you have and your estate more generally will pass appropriately.

How can I help my child financially when buying a house?

There are various ways in which you can help your child onto the property ladder, for example:

Making an outright gift

This means giving the money to your child without retaining any rights to repayment or any interest in the property. Where Inheritance Tax is a concern, it is advisable to document the gift by a Deed of Gift as evidence that the money has been given.

Gifting to a child may necessitate a change to your Will. For example, if you have other children you may wish to give more of the remaining estate to the other children to balance out the lifetime gift given to their sibling. Or you may wish to ensure that the gift is not deducted from your child’s inheritance if that is the intention.  Failure to consider and properly document the impact of the gift on your Will can lead to a result which is not in accordance with your wishes as well as the risk of future uncertainty and bad feeling within the family.

Lending funds to your child

Instead of gifting money to your child you may wish to lend funds. This gives you some protection as you will have the ability to get your money back if needed, for example if there is a relationship breakdown or if your financial circumstances change. It is advisable to enter into a loan agreement to avoid future disputes as to whether the money was a loan or a gift. Legal advice should be sought to make sure the loan complies with legal requirements.  

Acting as guarantor on a mortgage or as a joint mortgage

Some lenders may grant a mortgage where a parent acts as guarantor for their child. Acting as a guarantor means agreeing to be legally responsible to the mortgage provider for repayment of the loan if the borrowers can’t pay. Alternatively, you could be joined as a party to the mortgage, meaning you would be jointly and severally liable for it together with the other borrowers. It would be sensible to enter into an agreement with the other borrowers giving you the right to reclaim from them any monies you pay to the lender (although this will not protect you if they are insolvent). In some circumstances you may be able to take a charge over the property as further protection.

These options avoid having to provide funds upfront to your child, however they could leave you financially exposed if the other borrowers cannot, or do not, meet their future loan repayment obligations. They can also affect your own ability to borrow in the future.

Buying jointly with your child

This involves you taking a share in the property, typically in proportion to the share of the purchase proceeds you provided to your child. On the one hand, this enables you to receive any future uplift in property price on that share which you can then dispose of as you wish in your Will (or enjoy during your lifetime). However, there are Capital Gains Tax and Stamp Duty Land Tax ramifications, on which advice should be sought.

A Declaration of Trust should be completed to record the shares of each purchaser.

What happens if my child is buying a property with their partner?

It is becoming more common for young couples and/or cohabitees to jointly buy a property together. It is therefore important to consider the risk of some or all of the amount provided to your child being lost in the event of death or if there is a future relationship breakdown (particularly where the provision is made by way of gift).

Where two people own property jointly, they can opt to hold it as “joint tenants” or as “tenants in common”. If they opt to hold as joint tenants, the share in the property of a deceased joint tenant would automatically pass to the surviving joint tenant. This has the advantage of simplicity where the co-owners want to leave their shares to each other, however it would mean that the share of the deceased co-owner could not be left to their own family. Furthermore, the co-owners cannot have unequal shares in the property, so a co-owner making an extra contribution to the purchase price could not take a larger share.

Where property is held by the co-owners as ‘tenants in common’, this enables the joint owners to hold different percentage shares in the property and for the share of each joint owner to be left to their intended beneficiaries if they die via their Will.  The co-owners can enter into a declaration of trust setting out their respective shares. They should both consider who they would want to inherit their share and make Wills accordingly.

How can a declaration of trust help protect each co-owner’s property share?

A declaration of trust sets out the interests each co-owner has in the proceeds of sale of the property. This is especially important where one co-owner is contributing significantly more to the purchase price and/or mortgage repayments than the other, for example, with the benefit of a parental gift. The declaration of trust can give one co-owner a larger share of the future proceeds of sale, e.g. to reflect their additional contribution to the purchase price.

It is very important that the parties agree and properly document their respective interests in the property when it is purchased to reduce the risk of future uncertainty and disputes.

A declaration of trust can also set out other points the co-owners may wish to agree in relation to the property, for example what should happen if one of the co-owners wants to  sell the property or buy out the other co-owner.

What other issues do I need to consider when helping my child buy a property?

  • Tax – the different options for assisting your child will have varying tax repercussions for both you and your child, which should be considered in advance
  • Wills – both you and your child should consider the impact of the arrangements on your Wills.
  • Your financial position – you should consider the impact of the proposed assistance on your own financial situation; for example, whether you can afford to help and whether you might need the funds back in the future. This will impact your decision as to whether to help and the option chosen. You should consider taking appropriate financial advice.
  • Family issues – if your child goes through a divorce or separation, their assets (including the property share you have helped them with) could potentially be reduced by the family courts. There are options to protect against this, for example cohabitation agreements, prenuptial and post nuptial agreements.

We’re here to help

If you are involved in your child’s property purchase, our expert advisers are here to help you navigate the legal and tax implications. We will liaise with our Residential Property Team to fully understand your requirements and ensure the careful preparation of a Declaration of Trust to accurately reflect the ownership of the property, so that both your and your child’s financial interests are fully protected.

Appointing a guardian for your children in your Will

Posted on by Sophie Soraf

As parents, who would you entrust the care of your children to, were the unthinkable to happen?

This question is not one many of us are comfortable considering as it is likely to stir up a lot of emotion and sometimes, conflict between parents who may have differing views.

However, if you have parental responsibility it’s vitally important that you make plans for the care of your children in your Will in the event that both of you were to pass away. Not only is this in the best interests of your children, but it will also allow you to feel as confident as possible that you have made the best possible arrangements for your children’s future and security.

What is a legal guardian?

A legal guardian is someone who has the legal authority to take care of your children should anything happen to you. Guardians are responsible for taking all parental decisions and can also be made responsible for managing your children’s property and inheritance (although responsibility for managing property and inheritances can instead be given to others).

What powers does a guardian have?

A guardian, whether appointed under a Will or by the Court, has parental responsibility for the child or children within his or her custody. Upon appointment, the guardian has all the rights, duties, powers, responsibilities and authority that a parent of a child holds in relation to that child.

In practical terms this means that the guardian can make decisions about where your children live, who lives with them, any decisions relating to their education or health and is entrusted with protecting, maintaining and disciplining them.

Therefore, it is very important to choose a guardian who you feel is best equipped to make these important decisions for your children.

Who should I choose as a guardian?

It is impossible to make generalisations about the relative or friend best suited to act as a guardian for your children. We all live in different circumstances and contexts so the choice of a guardian will likely be highly personal. However, some key considerations are likely to include:

  • The age of your children – as your children get older the caring responsibilities will change, so your initial choice of guardian(s) may be a decision you wish to re-evaluate at some point in the future
  • The age of the guardians – for most people, their first choice of guardian is the child’s grandparents. It is worth considering how old they are before making this decision.
  • How many children you have and if the guardian(s) you choose would be willing to take care of them all – the more children you have the greater the financial implications
  • How many children they have – if you choose a sibling or friends as guardians, do they already have their own children? If so, they may not be in a position to take responsibility for your children as well
  • Attitudes and beliefs – do those you wish to appoint share the same beliefs or religion as you? Will they bring up your children to have the same values as you would?
  • Financial situation – are your chosen guardians financially stable? Would they be willing or able to reduce their working hours to take care of your children?
  • Where they live – if they live far away from you, will this mean that your children would need to move to a new school, away from family and friends and what impact could this have on them?

There is unlikely to be a perfect scenario. Ultimately the most important thing is that by appointing a legal guardian in your Will, you have peace of mind having made the decision as to who will look after your children in the event that you are no longer there.

If you would like to appoint a legal guardian, talk to us today.

Do I have the right to appoint a guardian for my child?

You must have what is legally referred to as ‘parental responsibility’ in order to be able to appoint a guardian over a child under 18 years of age.

Parental responsibility means all the legal rights, duties, powers, responsibilities and authority which a parent has for a child by law.

A mother automatically has parental responsibility for her child from birth. A father will attain parental responsibility by either being married to the child’s mother at the time of the child’s birth, or by being named on the birth certificate.

If a father satisfies neither of these, but he would like to gain parental responsibility for his child, then he will either need to agree with the child’s mother for them both to sign a Parental Responsibility Agreement or he will need to apply to the Court for a Parental Responsibility Order.  Other ways a father may obtain parental responsibility for his child include being named in a Child Arrangements Order as a person with whom his child will live or marrying the child’s mother after the child is born.

In the case of same-sex female parents, the woman who carried the child is treated as the child’s mother and automatically has parental responsibility for the child from birth.  The second female parent will automatically have parental responsibility if she is a same-sex spouse or civil partner of the child’s mother at the time of the fertility treatment and consented to the treatment.  Otherwise, she would acquire parental responsibility in the same way as an unmarried father.

In the case of same-sex male parents who have a child born to them through surrogacy, they may acquire parental responsibility in a slightly different way.

If one of the male parents is a ‘biological’ father of the child and is named on the child’s birth certificate, he will automatically acquire parental responsibility in the same way as any other unmarried father.

If any parents, same-sex or heterosexual, use a surrogate, the process is more complicated.  For legal purposes, the surrogate mother who gives birth to the child is the child’s mother and automatically has parental responsibility for them.  The intended parents need to obtain a parental order from the court, which will give them both parental responsibility and bring the surrogate mother’s parental responsibility to an end.  Certain criteria must be met, which are complex and under these circumstances it is particularly important to seek specialist legal advice.

Step-parents may think they automatically gain parental responsibility for their step-child when they marry that child’s mother or father, but in fact, both biological parents would have to give their consent for the step parent to enter into a Parental Responsibility Agreement, obtain a Parental Responsibility Order through the Court, or be named in a child arrangements order as a person with whom the child will live.

When does the appointment of a guardian take effect?

The appointment of a guardian under a Will takes effect on the death of the last surviving parent with parental responsibility. For example, Anna and Bill are married and both have parental responsibility for their child, Cameron. In Bill and Anna’s Wills, they both appoint Anna’s sister, Dianne, as the guardian for Cameron. Should Anna pass away before Cameron reaches the age of 18, Dianne does not become the guardian for Cameron, as Bill remains the surviving parent with parental responsibility. Should Bill also pass away before Cameron reaches the age of 18, then Dianne’s appointment becomes effective.

The above example is straight-forward, however things can become more complex should two parents with parental responsibility appoint different guardians in their Wills – perhaps because they have separated.

Consider the same example, but that Anna appoints Dianne as the guardian for Cameron in her Will and Bill appoints his brother, Edward, as the guardian for Cameron in his Will. Should Anna and Bill pass away before Cameron reaches 18, whether simultaneously or otherwise, then both guardianship appointments become effective: Dianne and Edward are both guardians of Cameron and must now co-ordinate their efforts – possibly something Anna and Bill had not intended and perhaps not in Cameron’s best interests.

As an alternative to the above, you may wish to appoint a guardian in your Will subject to certain conditions. You could stipulate various conditions such as:

  • The guardian you name may be appointed whilst they live in a certain region, perhaps where the child is settled
  • The couple you appoint may only act as guardians whilst that couple is together
  • The child’s grandparent should only be the guardian up to a certain age, at which point another individual would become the appointee.

It is impossible to account for all circumstances, but specific concerns or wishes should be drafted clearly and effectively.

How should the child’s finances be managed?

Child Poverty Action Group estimated in 2018 that the cost to raise a child from birth to 18 years for a couple family is estimated at around £75,000, rising to £100,000 for a lone-parent family.  Clearly, there are substantial costs involved in raising a child and you may, therefore, wish to give consideration as to how the guardians of your children would manage financially. At the same time, you will be concerned to ensure that your children’s assets, including any inheritance they receive from you and their other parent and any trust funds, are managed appropriately for their benefit.

Many children are left with significant assets of their own after the death of their parents, for example:

  • They may have inherited significant assets under the Wills of their parents,
  • The parents may have created trust funds for them (including any life insurance policies placed under trust).

Their grandparents may wish to make provision for them during their lifetimes or by Will. Whilst the children are young, it may be necessary for the income or capital of some of these funds to be used for their benefit (e.g. towards the costs of their upbringing). The ability to do this will depend on the terms under which the assets are held (e.g. the wording of the Will or trust document).

It is also relevant to consider who will be making decisions about management of the child’s finances. Assets left to a child under a Will would generally be managed by trustees appointed under the Will while the child is under 18 (often, but not necessarily, the executors of the Will). Assets left under a trust will be managed by the trustees. It is important to give careful consideration to who should manage the funds. Some people are happy to appoint the guardians so that they can manage the child’s finances as well as looking after them. However, it should also be kept in mind that the guardians may have a conflict of interest as they could benefit indirectly from use of the funds. Therefore, some parents prefer to appoint other trusted friends, family members or professionals to manage the funds (either alone or alongside the guardians).

Another important consideration is at what age children should be able to make financial decisions themselves. Where assets are left to them outright, they are generally able to access them at age 18. Some parents will be concerned that this may be too young, in which case it is possible to specify a different age in the Will or to use ongoing trusts. There are, however, some tax issues that may be relevant to this decision, depending on the circumstances.

For all of the above reasons, it is important for parents with significant assets to take appropriate legal advice to ensure that the documentation under which the child’s assets are held is worded appropriately. It is also sensible for them to leave the executors/trustees a letter detailing how they would wish them to exercise their powers and discretions.

Long-term Care Planning: Get the Best Advice

Posted on by Sophie Soraf

Our SOLLA (Society of Later Life Advisers) accredited care fee planning team can help you create a robust plan for later life, in order to avoid difficult financial decisions for yourself and your loved ones down the line.

Long-term care refers to the range of services available to support those who need long-term or permanent assistance in caring for themselves. This can include residential and nursing home care, as well as domestic help.

Services are provided by a wide range of different bodies and organisations, including local Authorities, the NHS, private organisations and charities.

In the UK, better standards of living and improvements in healthcare have led to people enjoying a longer life expectancy. While in 1950, the average person could expect to live until they were nearly 69 years of age, today we have a life expectancy of over 81 years old.

While many older people can now expect to live to an advanced age in good health, it is inevitable that some will require care and assistance as they reach their later years.

How much does long-term care cost?

According to the Money Advice Service, the average annual cost of residential care is between £30,000 and £40,000 per year. These costs may not be all-inclusive, either – visits to the hairdressers, day trips and other forms of entertainment, for example, can all cost extra.

Home care costs will vary according to the person’s needs. On average, the cost of a home carer is around £17 per hour. So, even if you only need two hours of care per day, it could still add up to £12,500 per year.

Does the government help to pay long-term care fees?

Government funding is available to help you with the costs of long-term care. The amount to which you are entitled varies across the UK, with each devolved nation offering different levels of support.

In the autumn statement 17th November 22, chancellor Jeremy Hunt said the introduction of the new £86,000 cap on the amount anyone in England will need to spend on their personal care over a lifetime, will be delayed two years and now come into effect in 2025.

England and Northern Ireland

If you live in England or Northern Ireland, the government funding you receive will depend on how much capital you have. If you have capital assets: 

Less than £14,250: You’re entitled to local government funding to cover the cost of your care. You won’t be expected to contribute from your capital, but if you are still drawing an income (e.g. a State or private pension), you’ll be expected to contribute this except for a personal expenses allowance (PEA) of £24.90 per week. If the cost of your care is more than your local authority’s standard rate, you may have to pay the difference – this is called a ‘third party top up’.

Between £14,250 and £23,250: You’ll be entitled to some funding, but you may have to contribute all income in excess of the PEA, as well as £1 per week for every £250 in capital you have between the upper and lower limits. For example, if you have savings of £21,000, you’ll be expected to contribute £27 of your capital per week in addition to your income.

Over £23,250: You will have to pay for your own care.

Scotland

The capital limits are higher in Scotland, but similar rules apply.

If you have capital assets: 

Less than £18,000: You’re entitled to funding to help with your care fees. As above, you won’t be expected to contribute from your capital, but you will be expected to contribute all income over the PEA (£28.75 per week in Scotland).

Between £18,000 and £28,500: You’ll be entitled to some funding from your local authority, but will be expected to contribute £1 of your capital per week for every £250 you have between the upper and lower limits, as above.

Over £28,500: You will be expected to pay the full cost of your care.

Wales

In Wales, there are different rules depending on whether you need at-home or residential care.

At-home care

If you have capital worth: 

Less than £24,000: You will not be expected to use your capital to pay for your care. Your local authority can only look at your income when deciding what to charge you.

Over £24,000: You will be obliged to pay for your home care, but the Welsh government has capped the cost at a maximum of £90 per week.

Residential care

If you have capital worth: 

Under £50,000: You won’t be expected to use your capital to pay for residential care. You will, however, be expected to contribute all income in excess of the PEA, (£32 per week in Wales).

Over £50,000: You will be expected to pay the full cost of your care until your capital is reduced to £50,000 or below.

What counts as ‘capital’ for long-term care means tests?

For the purpose of local authority means tests, your ‘capital’ includes the value of the following assets:

  • Property (although this can be disregarded under certain circumstances)
  • Money held in bank accounts/building societies
  • Investments
  • Premium bonds
  • Cash
  • Any benefits you’re eligible for (even if you’re not claiming them)

What if I’m not entitled to government funding for my long-term care needs?

If you have a disability or complex health needs, you may be eligible for NHS continuing healthcare (CHC) free of charge. It is a package of care that can be provided at home, in a nursing care home or in a hospice. You’re more likely to qualify if you have healthcare, as opposed to social care needs.

If you are ineligible for government or NHS funding, there are ways to self-fund your care. Whether you’re paying in full or in part, the costs can mount up and it’s wise to prepare yourself financially. You could do this, for example, through savings and investments, or through a care fees plan (also known as an immediate needs annuity). This is a specialist insurance plan designed to convert capital into income to meet your care fees.

Consulting with an independent financial adviser well ahead of time will equip you with the tools you need to prepare yourself for the potential costs of long-term care.

Will I have to sell my house to pay for long-term care?

Your property will be included in government means test assessments, except in the following circumstances:

  • Your spouse/civil partner lives in the property
  • A disabled relative lives in the property
  • A relative over the age of 60 lives in the property
  • A child under the age of 16 lives in the property
  • Your care needs are only temporary
  • You are in your first 12 weeks of needing permanent care

If you do need to sell your home to pay your care home fees, the 12-week deferment period (which only applies if your capital falls under the upper limit in your country of residence) gives you time to find a buyer for your property and complete the transaction before you have to start paying fees.

Can I give away my property so it’s not included in the means assessment?

Even if you give your home away, for example to your child or another relative, it may still be counted as capital in the means test. This is because your local authority may see it as a ‘deprivation of assets’. This means that you have gifted your property for the sole purpose of discounting it from a means assessment. So, you might have to pay for the cost of your care as if you still owned your home anyway.

What happens when I can no longer make important decisions for myself?

Some people who require long-term care have lost mental capacity, and no longer have the ability to look after their money or advocate for their needs. That’s why planning ahead is so important, to enable your family to step in and manage your affairs when you need it most.

You can nominate somebody who is legally entitled to manage your personal and financial affairs with a document called a Lasting Power of Attorney (LPA). There are two types of LPA:

  • Health and Welfare LPAs allow your nominated attorney to make vital decisions relating to your health and personal welfare (including decisions surrounding long-term care);
  • Property and Finance LPAs will allow them to make key decisions about your money and property (e.g. whether or not to sell your house to pay for care home fees and accessing your capital to pay for your care).

Without an LPA in place, your family could face a drawn-out court process before they are able to give you the help you need.

Assistance is at hand

If you have capital and property that places you above the capital limits in your country of residence, then it is extremely important to seek professional independent financial advice from an adviser specialising in long-term care planning.

Our SOLLA (Society of Later Life Advisers) accredited care fees planning team can help you create a robust plan for later life, in order to avoid difficult financial decisions for yourself and your loved ones down the line.

At Tees we offer expert independent financial as well as legal advice which gives us the ability to combine your financial planning and legal needs, giving you a fully joined-up view.

We can take care of your later life financial plans in conjunction with advising you on estate planning and Powers of Attorney. We’re here to help, and only a phone call away.

 

This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Past performance is not a reliable indicator of future returns and all investments involve risks. Some information quoted was obtained from external sources we consider to be reliable.

Tees is a trading name of Tees Financial Limited which is authorised and regulated by the Financial Conduct Authority. Registered number 211314. Tees Financial Limited is registered in England and Wales. Registered number 4342506.

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All legal services provided by Tees are regulated by the Solicitors Regulation Authority. Tees is a trading name of Stanley Tee LLP is authorised and regulated by the Solicitors Regulation Authority (SRA Number 464615) and is registered in England and Wales number OC327874.

All financial services provided by Tees are regulated by the Financial Conduct Authority. Tees and Tees Wealth are trading names of Tees Financial Limited which is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales number 4342506. Registered office address Tees House, 95 London Road, Bishop’s Stortford CM23 3GW.

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All legal services provided by Tees are regulated by the Solicitors Regulation Authority. Tees is a trading name of Stanley Tee LLP is authorised and regulated by the Solicitors Regulation Authority (SRA Number 464615) and is registered in England and Wales number OC327874.

All financial services provided by Tees are regulated by the Financial Conduct Authority. Tees and Tees Wealth are trading names of Tees Financial Limited which is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales number 4342506. Registered office address Tees House, 95 London Road, Bishop’s Stortford CM23 3GW.

Copyright © 2025 Tees Law. All rights reserved.

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