Socially responsible investing

Not sacrificing your life principles in exchange for chasing the best financial returns

For investors concerned about global warming and other environmental issues, there are a plethora of ethical investments that cover a multitude of different strategies. The terms ‘ethical investment’ and ‘socially responsible investment’ (SRI) are often used interchangeably to mean an approach to selecting investments whereby the usual investment criteria are overlaid with an additional set of ethical or socially responsible criteria.

Pension freedoms

The most radical changes to pensions in almost a hundred years

In April 2015, the Government introduced the most radical changes to pensions in almost a hundred years. From April last year, individuals from the age of 55 with a defined contribution pension can now access their entire pension flexibly if they wish.

Tax relief and pensions

Annual and lifetime limits
Tax relief means some of your money that would have gone to the Government as tax goes into your pension instead. You can put as much as you want into your pension, but there are annual and lifetime limits on how much tax relief you get on your pension contributions.

State Pension

New rule changes
The State Pension changed on 6 April 2016. If you reached State Pension age on or after that date, you’ll now receive the new State Pension under the new rules. The aim of the new State Pension is to make it simpler to understand, but there are some complicated changeover arrangements which you need to know about if you’ve already made contributions under the previous system.

Defined benefit pension schemes

Secure income for life
A defined benefit pension scheme is one where the amount paid to you is set using a formula based on how many years you’ve worked for your employer and the salary you’ve earned rather than the value of your investments. If you work or have worked for a large employer or in the public sector, you may have a defined benefit pension.

Using your pension pot

More choice and flexibility than ever before
Following changes introduced in April 2015, you now have more choice and flexibility than ever before over how and when you can take money from your pension pot, but it’s essential to obtain professional advice to decide what the best course of action you should take, as this will be your retirement income for the rest of your life.

Life insurance

Providing a financial safety net for your loved ones
Getting the right life insurance policy means working out how much money you need to protect your dependants. This sum must take into account their living costs, as well as any outstanding debts, such as a mortgage. It may be the case that not everyone needs life insurance (also known as ‘life cover’ and ‘death cover’). But if your spouse and children, partner, or other relatives depend on your income to cover the mortgage or other living expenses, then the answer is ‘yes’.

Valuing a deceased person’s estate

Responsibility for paying Inheritance Tax

To arrive at the amount payable when valuing a deceased personís estate, you need to include assets (property, possessions and money) they owned at their death and certain assets they gave away during the seven years before they died. The valuation must accurately reflect what those assets would reasonably receive in the open market at the date of death.

Inheritance Tax is payable by different people in different circumstances. Typically, the executor or personal representative pays it using funds from the deceasedís estate. The trustees are usually responsible for paying Inheritance Tax on assets in, or transferred into, a trust. Sometimes people who have received gifts, or who inherit from the deceased, have to pay Inheritance Tax – but this is not common.

Valuing the deceased personís estate is one of the first things you need to do as the personal representative. You wonít normally be able to take over management of their estate (called applying for probate or sometimes, applying for a grant of representation/confirmation) until all or some of any Inheritance Tax that is due has been paid.

The valuation process
This initially involves taking the value of all the assets owned by the deceased person, together with the value of:

their share of any assets that they own jointly with someone else
any assets that are held in a trust, from which they had the right to benefit
any assets which they had given away, but in which they kept an interest ñ for instance, if they gave a house to their children but still lived in it rent-free
certain assets that they gave away within the last seven years

Next, from the total value above, deduct everything that the deceased person owed, for example:

any outstanding mortgages or other loans
unpaid bills
funeral expenses

(If the debts exceed the value of the assets owned by the person who has died, the difference cannot be set against the value of trust property included in the estate.)

The value of all the assets, less the deductible debts, gives you the estate value. The threshold above which the value of estates is taxed at 40 per cent is currently £325,000 (frozen until April 2014).

When the executor pays Inheritance Tax
Usually, the executor, personal representative or administrator (for estates where thereís no will) pays Inheritance Tax on any assets in the deceasedís estate that are not held in trust.

The money generally comes from the deceased personís estate. However, because the tax must be paid within six months of the death and before the grant of probate can be issued (or grant of confirmation in Scotland), sometimes the executor has to borrow the money or pay it from their own funds. This can happen if it hasnít been possible to get the money from the estate in time because itís tied up in assets that have to be sold.

In these cases, the executor or the people who have advanced the money can be reimbursed from the estate before itís distributed among the beneficiaries.

When a trustee pays Inheritance Tax
Inheritance Tax on transfers into trust is only necessary if the total transfer amount is above the Inheritance Tax threshold. Itís usually payable by the person making the transfer(s) – known as the settlor – not the trustees.

The trustees must pay any Inheritance Tax due on land or assets already held in trust. The occasions for this include:

a transfer out of trust (known as the exit charge)
every ten years after the original transfer into trust (known as the ten-year anniversary charge)
when the beneficiary of the trust (known as the life tenant) dies – interest in possession trusts only

When a beneficiary or a donee has to pay Inheritance Tax
If the executor or the trustees canít pay the Inheritance Tax, the beneficiaries or donees (recipients of gifts made during a personís lifetime) may have to pay it. A beneficiary or donee only has to pay Inheritance Tax in this case if:

they receive a share of an estate after a death
they receive a gift from someone who dies within seven years of making the gift
they benefit from assets in a trust at the time of death or receive income from those assets
they are the joint owner – other than a spouse or a registered civil partner – of a property

Doubling the Inheritance Tax threshold

Transferring assets can seriously improve your wealth

Current rules mean that the survivor of a marriage or registered civil partnership can benefit from up to double the Inheritance Tax threshold – £650,000 in the current tax year, in addition to the entitlement to the full spouse relief.

Inheritance Tax is only paid if the taxable value of your estate when you die is over £325,000. The first £325,000 of a person’s estate is known as the Inheritance Tax threshold or nil rate band because the rate of Inheritance Tax charged on this amount is currently set at zero per cent, so it is free of tax.

Transferring exempt assets
Where assets are transferred between spouses or registered civil partners, they are exempt from Inheritance Tax. This can mean that if, on the death of the first spouse or registered civil partner, they leave all their assets to the survivor, the benefit of the nil rate band to pass on assets to other members of the family, normally the children, tax-free is not used.

Where one party to a marriage or registered civil partnership dies and does not use their nil rate band to make tax-free bequests to other members of the family, the unused amount can be transferred and used by the survivor’s estate on their death. This only applies where the survivor died on or after
9 October 2007.

In effect, spouses and registered civil partners now have a nil rate band that is worth up to double the amount of the nil rate band that applies on the survivor’s death.

Since October 2007, you can transfer any of the unused Inheritance Tax threshold from a late spouse or registered civil partner to the second spouse or civil partner when they die. This can currently increase the Inheritance Tax threshold of the second partner from £325,000 to as much as £650,000, depending on the circumstances.

Spouse or registered civil partner exemption
Everyone’s estate is exempt from Inheritance Tax up to the current £325,000 threshold (frozen until April 2014).

Married couples and registered civil partners are also allowed to pass assets from one spouse or registered civil partner to the other during their lifetime or when they die without having to pay Inheritance Tax, no matter how much they pass on, as long as the person receiving the assets has their permanent home in the UK. This is known as spouse or registered civil partner exemption.

If someone leaves everything they own to their surviving spouse or registered civil partner in this way, it’s not only exempt from Inheritance Tax but it also means they haven’t used any of their own Inheritance Tax threshold or nil rate band. It is therefore available to increase the Inheritance Tax nil rate band of the second spouse or registered civil partner when they die, even if the second spouse has re-married. Their estate can be worth up to £650,000 in the current tax year before they owe Inheritance Tax.

To transfer the unused threshold, the executors or personal representatives of the second spouse or civil partner to die need to send certain forms and supporting documents to HM Revenue & Customs (HMRC). HMRC calls this transferring the nil rate band from one partner to another.

Transferring the threshold
The threshold can only be transferred on the second death, which must have occurred on or after 9 October 2007 when the rules changed. It doesn’t matter when the first spouse or registered civil partner died, although if it was before 1975 the full nil rate band may not be available to transfer, as the amount of spouse exemption was limited then. There are some situations when the threshold can’t be transferred but these are quite rare.

When the second spouse or registered civil partner dies, the executors or personal representatives of the estate should take the following steps.

Calculating the threshold you can transfer
The size of the first estate doesn’t matter. If it was all left to the surviving spouse or registered civil partner, 100 per cent of the nil rate band was unused and you can transfer the full percentage when the second spouse or registered civil partner dies even if they die at the same time.

It isn’t the unused amount of the first spouse or registered civil partner’s nil rate band that determines what you can transfer to the second spouse or registered civil partner. It’s the unused percentage of the nil rate band that you transfer.

If the deceased made gifts to people in their lifetime that were not exempt, the value of these gifts must first be deducted from the threshold before you can calculate the percentage available to transfer. You may also need to establish whether any of the assets that the first spouse left could have qualified for Business or Property Relief.

Supporting a claim
You will need all of the following documents from the first death to support a claim:

a copy of the first will, if there was one
a copy of the grant of probate (or confirmation in Scotland), or the death certificate if no grant was taken out
a copy of any deed of variation if one was used to vary (or change) the will

If you need help finding these documents from the first death, get in touch with the relevant court service or general register office for the country you live in. The court service may be able to provide copies of wills or grants; the general register offices may be able to provide copies of death certificates

The relevant forms
You’ll need to complete form IHT402 to claim the unused threshold and return this together with form IHT400 and the forms you need for probate (or confirmation in Scotland).

You must make the claim within 24 months from the end of the month in which the second spouse or registered civil partner dies.

Inheritance tax nil rate band and rates

We can help you evaluate the size of your estate

We can help you evaluate the size of your estate – which could include assets such as property, pensions, shares and personal property – and identify the opportunities that will help you avoid or reduce the amount of Inheritance Tax your family will have to pay on your estate and enable you to preserve wealth for your dependents if the worst comes to the worst.

We can advise on making appropriate provisions for vulnerable beneficiaries, protecting their resources whilst continuing to benefit from them. You may also want to consider appointing a Lasting Power of Attorney who can manage your affairs in the event you become unable to do so.

Our aim is to maximise the inheritance your beneficiaries will receive, avoiding or minimising the amount of Inheritance Tax your family will have to pay on your estate, ensuring plans are in place to protect your property so that you are not forced to sell your home to pay for your care home costs should the need arise.

We are on hand to provide straightforward, up-to-date advice. We will assess your situation and provide advice on a number of tax migration solutions, creating bespoke estate protection planning strategies that are tailored to suit you and your circumstances.