Month: February 2017

Lifetime Allowance Protection Deadline Is Approaching

With almost two months left, there is still plenty of time for the usual tax year end optimisation tasks (we will provide detailed guidelines at the beginning of March). However, this year’s 5 April also marks the deadline for Lifetime Allowance Individual Protection 2014 application, which may require longer time to prepare. If you are still unsure whether you should take advantage of it, now is the time to review your pension and make the decision. Below we will summarise the most important facts and rules.

Lifetime Allowance and Its Reductions

The Lifetime Allowance (LTA) caps the total amount you can draw from your pension throughout your life before triggering the so called LTA charge – a rather high special tax, currently at 25% for benefits taken as income and 55% for a lump sum.

In the recent years, as part of the overall effort to make public finances more sustainable, the Government reduced the LTA on three occasions:

  • In 2012 from £1.8 million to £1.5 million
  • In 2014 to £1.25 million
  • In 2016 to £1 million

LTA Protection

Those who have built up pension pots large enough to exceed the new lowered LTA have the option to apply for LTA protection, as a compensation for the unfavourable rule changes. There have been different versions of LTA protection, always specific to the particular LTA reduction (year) and subject to different conditions (e.g. whether you can continue contributing to your pension plan).

The one whose deadline is approaching now is Individual Protection 2014 (IP 2014), designed for those affected by the 2014 LTA decrease from £1.5m to £1.25m who have continued to contribute to their pension plans after 5 April 2014 or intend to make further contributions in the future.

What Individual Protection 2014 Does

IP 2014 sets your personalised LTA to the lower of:

  • The value of your pension at 5 April 2014
  • £1.5 million

For example, let’s say your pension was worth £1.4 million at 5 April 2014 – within the old LTA effective before the 2014 reduction (£1.5m), but above the new one (£1.25m). As a result, part of your pension would become liable for the LTA charge upon withdrawal. If you apply for IP 2014, you can have LTA set individually to £1.4 million, possibly saving 25% (income) or 55% (lump sum) of £150,000 in LTA charges.

Applying for IP 2014

IP 2014 is not granted automatically and you must make a formal application by 5 April 2017. After that date the opportunity is lost forever.

In order to do so, you first need to know the value of your pension (or the combined value of all your plans if you have more than one) at 5 April 2014. Depending on pension provider, this may take considerable time to find out, which is why we recommend to start immediately.

In general, an application makes sense for those with pensions worth above £1.25m at 5 April 2014. You can apply even if your pension was worth more than £1.5m (above the old LTA) – in such case your personal LTA would be protected at £1.5m.

If You Already Have LTA Protection

Note that you can have multiple versions of LTA protection at the same time. In other words, you can also apply for IP 2014 even if you already have some of the other kinds of LTA protection in place, such as a fixed protection (any of the years) or enhanced protection (but those with primary protection are ineligible).

Applying for IP 2014 can make sense even when you already have a more favourable LTA protection in place. Different versions are subject to different conditions, and some actions (such as making further contributions to your scheme) may invalidate certain kinds of LTA protection going forward – then you will be able to use the next best version you have.

More Information and Assistance

You can find more detailed official information on the HMRC website. We would be happy to provide more detailed explanation, or assist with obtaining pension scheme details and making the application. You can contact us here

Inheritance Tax Planning and the New Main Residence Nil-Rate Band

Effective from 6 April 2017, a new main residence nil-rate band (RNRB) will be available on top of the existing inheritance tax (IHT) threshold. It can potentially save tens of thousands in IHT, but at the same time, compared to the existing IHT threshold it is subject to stricter conditions. Let’s have a look at the key points.

Summary of Existing IHT Rules

First let’s start with the basic rules which are already in place and will continue to apply:

  • IHT is due when passing assets to your children, or generally to anyone other than your spouse, civil partner, a charity or a community amateur sports club.
  • The headline IHT rate is 40%, reduced to 36% if at least 10% of the estate is given to charity.
  • The first £325,000 of your estate is free of IHT. This is called the IHT threshold or nil-rate band. Unused portion can be transferred to your spouse, which effectively makes the IHT threshold £650,000 for couples.
  • Besides the IHT threshold, there are various reliefs applying to different kinds of assets and subject to different conditions, which can further reduce the IHT liability. The Business Relief is a common example.

The New Main Residence Nil-Rate Band

The new RNRB will be available on top of the existing IHT threshold. It will be phased in gradually over the next four tax years, from £100,000 in 2017-18 to £175,000 in 2020-21. From 2021 on it should continue to grow in line with inflation. The full RNRB will be available only for estates worth under £2 million. It will be reduced by £1 for every £2 above the £2 million taper threshold.

Like the existing IHT nil-rate band, the new RNRB will be transferable between spouses or civil partners. Transfers will be possible even when the first partner died before 6 April 2017, even though the RNRB wasn’t available at that time (the unused portion of the RNRB is transferred as percentage rather than amount).

Importantly, while the existing IHT threshold has no restrictions in terms of how many items or which kinds of assets are included or who the beneficiaries are, the new RNRB only applies to one residential property being passed to children or direct descendants.

Who Qualifies As Direct Descendant

The new RNRB can be used only when passing your property (or a part of it) to the following:

  • Your children and their lineal descendants (e.g. your grandchildren). There are no age restrictions – the beneficiary can be under or over 18 at the time when you die.
  • Spouses or civil partners of the above, also including widows/widowers.
  • Your step-children, adopted children or foster children.

On the contrary, your siblings, nephews, nieces and other relatives do not qualify.

What Qualifies as Main Residence?

The RNRB has been designed to reduce the tax burden for families when passing on the family home to the next generation. Therefore, it can only be used for one property where the deceased has lived at some stage. A holiday home may qualify. A buy-to-let property won’t. When the estate includes multiple properties where the deceased has lived, the beneficiaries or personal representatives can choose one (but only one).

If you downsize or cease to own your home prior to your death and lose access to the RNRB as a result, your personal representatives may be able to make a claim for the so called downsizing addition to compensate for the lost RNRB. Conditions apply and the claim must be made within 2 years after the end of month when you die.

What It Means for Inheritance Tax Planning

The new RNRB is a welcome tax saving opportunity, making the total potential allowance £500,000 for individuals or £1 million for couples. When used to its maximum potential, the RNRB can save a couple as much as £140,000 of IHT (2 x £175,000 x 40%, using the 2020-21 RNRB). A good understanding of the rules and careful advance planning are essential for minimising future tax liability.