Tag: IHT

Social Care & Wealth Protection

What we gain on the swings needs to remain with us on the roundabouts

There are some interesting things afoot in the world of personal taxation. With two seemingly separate, but intertwined, taxes that all of us should be thinking about.

They are the freeze on Inheritance Tax (IHT) and the 1.25% levy and dividend tax the Prime Minister has just introduced to help fix social care. With hidden connections and implications that could directly affect your estate.

The cap on social care may generate some unforeseen problems for your estate

In order to help pay for on-going social care, on 7 September the Prime Minister announced an increase in the Dividend Rates in line with the 1.25% increase in National Insurance. This new levy will apply to everyone in work, including pensioners who had previously been exempt from NI payments after reaching state pension age.

The other significant announcement was that, coming into effect in October 2023, there will be an £86,000 cap on the cost of social care that any one person should pay during in their lifetime.

Until an individual reaches that cap, anyone with more than £100,000 in assets will be responsible for paying all their own care costs. Whilst those with assets between £100,000 and £20,000 will have their care partly subsidised, via local councils. With any individual with assets lower than £20,000 having all care costs paid for them.

While this is a long awaited reform to the current challenges concerning the funding of social care, it may have an unwelcomed knock-on effect regarding IHT.

It’s a stealthy attack on the wealthy

Retaining more of our assets could result in an increasing IHT liability.

The IHT nil rate freeze has resulted in the Government’s most recent Inheritance Tax receipts growing by £500 Million between April and July 2021. That’s a massive 33% up on the same period for 2020.

The reason for this dramatic increase in IHT revenues is simple. Whilst the IHT rate has stayed the same, asset values have continued to grow. This has been fuelled by increases in house prices, along with raises in the investment markets as the world’s economies come out of the Pandemic.

The hidden impact of this asset growth is that many of us will become unknowingly entangled in the Chancellor’s IHT net, as thresholds are silently crossed.

Add to that the impact of the Social Care cap and you’ll begin to realise why a refocusing on your IHT position is long overdue.

In an ever-changing landscape, reviews are essential

Just because there are no changes due to the IHT rate until April 2026 at the earliest, don’t fall into the trap of believing there is nothing to do with regard to IHT planning.

The increase of £0.5 Billion being collected in IHT should set the alarm bells ringing.

With the supercharged 10.2% increase in assets from March 2020-2021, that the housing market has caused, combined with the lack of access to one to one IHT planning with a financial expert, the pandemic has created the perfect storm for IHT.

As we emerge, blinking into the sunlight of the post-pandemic lockdown, now is the perfect time to re-evaluate the protection of your wealth. Not just from IHT and other stealth taxes, but also from other misfortunes that can befall your heirs, including the payment of care fees.

Depending upon your own unique circumstances, there will be all sorts of options available for you to consider. It may be as simple as revisiting your will and your gifting allowances. You may even want to explore setting up Trusts or making better use of your Pension.

According to Financial Service Industry data, in the past fiscal year alone, just 10% of clients have mitigated their IHT position. That means 90% of us are unaware that our IHT position may urgently need specialist advice to help avoid unnecessary payments. With many people unknowingly generating a large IHT legacy, because they are unaware of the impact of asset growth and don’t consider themselves as rich enough to worry about IHT.

The impact of care fees on those with estates below the IHT threshold, even allowing for the recently announced cap, can be even more severe than IHT, which only applies at 40% on joint estates over £650,000.

Protecting your wealth from IHT or care fees starts with a phone call to us. If you have any questions regarding how any of this could impact upon you, then please don’t hesitate to contact one of our team at Bridgewater Financial Services. One of our independent experts will be on hand to help in any way.

Stay on the right side of the law with Lasting Power of Attorney

Whilst Lasting Powers of Attorney can be the ideal way to safeguard the financial affairs of someone who has unfortunately lost the capacity to do it for themselves (the donor), it does come with some important and onerous responsibilities. 

If you are not fully aware of these, then there is a danger that you could end up with a court judgment against you. In fact, in 2018/2019 court judgements against people acting outside their permitted powers more than doubled on the previous year.

It’s a complex area of law. However following a recent ruling by the Court of Protection (COP), which was referred to them by the Office of the Public Guardian (OPG), new guidance is now available. In order to save you the job of sifting through the Court’s judgement and summary, I’ve highlighted the main points in this blog.

The majority of cases under review contained compulsory instructions given to the person with the power of attorney (an attorney) on how they should act. The court rules that the use of compulsory instructions was incompatible with the notion of having to ‘act in the best interest’ of the donor and that an attorney should not be bound by such instructions.

In terms of an attorney using the donor’s money for the benefit of others, without the need of gaining approval from the COP, the judge also made the following important comments:

How to make gifts 

The Mental Capacity Act 2005 clearlysets out what gifts an attorney is able to make. With restrictions in place to protect the donor’s assets from being ‘gifted away’.

As an attorney, you are able to make gifts on birthdays, Christmas or to charities the donor may have previously been a supporter of; with the value of that gift been seen to be reasonable and not detrimental to the donor’s future financial needs.

Obviously this hinders any estate planning that hopes to use large gifts as a mechanism for reducing the value of the estate.

It is possible to make gifts outside of these restrictions by applying to the COP. However this will add costs and delays, with no guarantee of a successful outcome.

If the donor is still capable of making the gifts themselves, then this should be supported. Although, if the donor has any intentions of making substantial gifts this is best done prior to incapacity becoming an issue.

Can an attorney provide for others?

If a payment is deemed to meet the needs of someone the donor was obliged to provide for, such as a spouse or any dependents, then this has always been viewed differently to that of a gift.

However, the recent ruling by the COP has extended this. The Judge commented upon the requirement to act in the ‘best interests’ of the donor, so felt that an attorney shouldn’t just be limited to ‘needs’, but should also take into consideration the donor’s ‘past and present wishes and feelings, beliefs and values’. Which broadly means that an attorney can do whatever he or she believes that the donor may have reasonably done themselves; but you may need to provide some evidence of this. 

Providing evidence of intention

The best evidence of intent comes from a donor’s past behaviour. Or, better still, an expression of intent included within the power of attorney document. 

When making decisions an attorney need only take evidence into account, they are not bound by it. As an attorney’s main consideration should always be the best interest of the donor and not the interest of the recipient.

Be aware that justifying an action on the basis of saving Inheritance Tax (IHT) is unlikely to be deemed to be in the donor’s best interest. There needs to be other factors and motives, although the size of the donor’s estate and associated costs of lifestyle and care can also influence decisions.

As a general rule, and to avoid misinterpretation, any money transferred to an individual that falls outside the definition of a gift under the Mental Capacity Act 2005, will be deemed to be a transfer of value for IHT, unless it’s covered by an exemption.

Scottish independence!

If you are in Scotland, then the legal position is a little different.

An attorney is able to make gifts, including those for estate planning purposes, just as long as the donor has specifically included this within their power of attorney document.

To sum things up

The ruling by the COP provides greater opportunity for an attorney to provide for the needs of family members, without being confined to only providing gifts on birthdays or Christmas. However, these provisions need to be made in conjunction with a clear expression of wishes by the donor along with a belief, by the attorney, that these actions are in the best interests of the donor.

Any uncertainty should result in an application to the COP for further clarity and permission. 

As always, if you have any questions regarding Lasting Powers of Attorney, or if you need to put an LPA in place, then please contact us at Bridgewater Financial Services, where we will be delighted to guide you through the complex process.