Business protection

Posted on April 30, 2013 by - Uncategorized

Don’t overlook your most important assets, the people who drive your business

Every business has key people who are driving it forward. Many businesses recognise the need to insure their company property, equipment and fixed assets. However, they continually overlook their most important assets, the people who drive the business – a key employee, director or shareholder.

Key person insurance is designed to compensate a business for the financial loss brought about by the death or critical illness of a key employee, such as a company director. It can provide a valuable cash injection to the business to aid a potential loss of turnover and provide funds to replace the key person.

Share and partnership protection provides an agreement between shareholding directors or partners in a business, supported by life assurance to ensure that there are sufficient funds for the survivor to purchase the shares. It is designed to ensure that the control of the business is retained by the remaining partners or directors but the value of the deceased’s interest in the business is passed to their chosen beneficiaries in the most tax-efficient manner possible.

If a shareholding director or partner were to die, the implications for your business could be very serious indeed. Not only would you lose their experience and expertise, but consider, too, what might happen to their shares.

The shares might pass to someone who has no knowledge or interest in your business. Or you may discover that you can’t afford to buy the shareholding. It’s even possible that the person to whom the shares are passed then becomes a majority shareholder and so is in a position to sell the company.

The shareholding directors or partners in a business enter into an agreement that does not create a legally binding obligation on either party to buy or sell the shares but rather gives both parties an option to buy or sell, i.e. the survivor has the option to buy the shares of the deceased shareholder and the executors of the deceased shareholder have the option to sell those shares.
In either case it is the exercise of the option that creates a binding contract; there is no binding contract beforehand. This type of agreement is generally called a ‘cross-option’ agreement or a ‘double option’ agreement.

These are essential areas for partnerships or directors of private limited companies to explore.

Different forms of protection

Key person insurance – compensates your business up to a pre-agreed limit for the loss or unavoidable absence of crucial personnel, including the owner-manager. It is especially appropriate if your business depends on a few employees.

Critical illness cover – pays a sum of money to specific employees or the business owner in the event of a serious illness, such as a heart attack or stroke.

Income protection insurance – protects individuals by paying their salaries while they’re unable to work.

Private health insurance – funds private healthcare for specific employees. As well as being an extra benefit of employment, it could help them to return to work more quickly after an illness by paying for rehabilitation treatment.

Trust arrangements

Posted on April 30, 2013 by - Uncategorized

Do you have control over what happens to your estate, both immediately after your death and for generations to come?

Following the changes introduced by the Finance Act 2006, trusts still remain an important estate planning mechanism. A trust arrangement can ensure that your wealth is properly managed and distributed after your death, so that it provides for the people who depend on you and is enjoyed by your heirs in the way you intend.
A trust is often the best way to achieve flexibility in the way you pass on your wealth to future generations. You may decide to use a trust to pass assets to beneficiaries, particularly those who aren’t immediately able to look after their own affairs. If you do use a trust to give something away, this removes it from your estate provided you don’t use it or get any benefit from it. But bear in mind that gifts into trust may be liable to inheritance tax.

Trusts offer a means of holding and managing money or property for people who may not be ready or able to manage it for themselves. Used in conjunction with a Will, they can also help ensure that your assets are passed on in accordance with your wishes after you die. Here we take a look at the main types of UK family trust.

When writing a Will, there are several kinds of trust that can be used to help minimise an inheritance tax liability. On 22 March 2006 the government changed some of the rules regarding trusts and introduced some transitional rules for trusts set up before this date.

A trust might be created in various circumstances,
for example:

• when someone is too young to handle their affairs
• when someone can’t handle their affairs because
they’re incapacitated
• to pass on money or property while you’re still alive
under the terms of a Will
• when someone dies without leaving a Will (England
and Wales only)

What is a trust?
A trust is an obligation binding a person called a trustee to deal with property in a particular way for the benefit of one or more ‘beneficiaries’.

Settlor
The settlor creates the trust and puts property into it at the start, often adding more later. The settlor says in the trust deed how the trust’s property and income should be used.

Trustee
Trustees are the ‘legal owners’ of the trust property and must deal with it in the way set out in the trust deed. They also administer the trust. There can be one or more trustees.

Beneficiary
This is anyone who benefits from the property held in the trust. The trust deed may name the beneficiaries individually or define a class of beneficiary, such as the settlor’s family.

Trust property
This is the property (or ‘capital’) that is put into the trust by the settlor. It can be anything, including:

• land or buildings
• investments
• money
• antiques or other valuable property

The main types of private UK trust

Bare trust
In a bare trust, the property is held in the trustee’s name but the beneficiary can take actual possession of both the income and trust property whenever they want. The beneficiaries are named and cannot be changed.
You can gift assets to a child via a bare trust while you are alive, which will be treated as a Potentially Exempt Transfer (PET) until the child reaches age 18 (the age of majority in England and Wales), when the child can legally demand his or her share of the trust fund from the trustees.

All income arising within a bare trust in excess of £100 per annum will be treated as belonging to the parents (assuming that the gift was made by the parents). But providing the settlor survives seven years from the date of placing the assets in the trust, the assets can pass inheritance tax free to a child at age 18.

Life interest or interest in possession trust
In an interest in possession trust, the beneficiary has a legal right to all the trust’s income (after tax and expenses) but not to the property of the trust.

These trusts are typically used to leave income arising from a trust to a second surviving spouse for the rest of their life. On their death, the trust property reverts to other beneficiaries (known as the remaindermen), who are often the children from the first marriage.

You can, for example, set up an interest in possession trust in your Will. You might then leave the income from the trust property to your spouse for life and the trust property itself to your children when your spouse dies.
With a life interest trust, the trustees often have a ‘power of appointment’, which means they can appoint capital to the beneficiaries (who can be from within a widely defined class, such as the settlor’s extended family) when they see fit.

Where an interest in possession trust was in existence before 22 March 2006, the underlying capital is treated as belonging to the beneficiary or beneficiaries for inheritance tax purposes, for example, it has to be included as part of their estate.

Transfers into interest in possession trusts after
22 March 2006 are taxable as follows:

• 20 per cent tax payable based on the amount gifted into the trust at the outset, which is in excess of the prevailing nil rate band
• Ten years after the trust was created, and on each
subsequent ten-year anniversary, a periodic charge,
currently 6 per cent, is applied to the portion of the trust assets that is in excess of the prevailing nil rate band
• The value of the available nil rate band on each ten-year anniversary may be reduced, for instance, by the initial amount of any new gifts put into the trust within seven years of its creation

There is also an exit charge on any distribution of trust assets between each ten-year anniversary.

Discretionary trust
The trustees of a discretionary trust decide how much income or capital, if any, to pay to each of the beneficiaries but none has an automatic right to either. The trust can have a widely defined class of beneficiaries, typically the settlor’s extended family.
Discretionary trusts are a useful way to pass on property while the settlor is still alive and allows the settlor to keep some control over it through the terms of the trust deed.

Discretionary trusts are often used to gift assets to grandchildren, as the flexible nature of these trusts allows the settlor to wait and see how they turn out before making outright gifts.

Discretionary trusts also allow for changes in circumstances, such as divorce, re-marriage and the arrival of children and stepchildren after the establishment of the trust.

When any discretionary trust is wound up, an exit charge is payable of up to 6 per cent of the value of the remaining assets in the trust, subject to the reliefs for business and agricultural property.

Accumulation and maintenance trust
An accumulation and maintenance trust is used to provide money to look after children during the age of minority. Any income that isn’t spent is added to the trust property, all of which later passes to the children.

In England and Wales the beneficiaries become entitled to the trust property when they reach the age of 18. At that point the trust turns into an ‘interest in possession’ trust. The position is different in Scotland, as, once a beneficiary reaches the age of 16, they could require the trustees to hand over the trust property.

Accumulation and maintenance trusts that were already established before 22 March 2006, and where the child is not entitled to access the trust property until an age up to 25, could be liable to an inheritance tax charge calculated as a percentage of the value of the trust assets.

It has not been possible to create accumulation and maintenance trusts since 22 March 2006 for inheritance tax purposes. Instead, they are taxed for inheritance tax as discretionary trusts.

Mixed trust
A mixed trust may come about when one beneficiary of an accumulation and maintenance trust reaches 18 and others are still minors. Part of the trust then becomes an interest in possession trust.

Trusts for vulnerable persons
These are special trusts, often discretionary trusts, arranged for a beneficiary who is mentally or physically disabled. They do not suffer from the inheritance tax rules applicable to standard discretionary trusts and can be used without affecting entitlement to state benefits; however, strict rules apply.

Tax on income from UK trusts
Trusts are taxed as entities in their own right. The beneficiaries pay tax separately on income they receive from the trust at their usual tax rates, after allowances.

Taxation of property settled on trusts
How a particular type of trust is charged to tax will depend upon the nature of that trust and how it falls within the taxing legislation. For example, a charge to inheritance tax may arise when putting property into some trusts, and on other chargeable occasions – for instance, when further property is added to the trust, on distributions of capital from the trust or on the ten-yearly anniversary of the trust.

Wealth protection

Posted on April 30, 2013 by - Uncategorized

Without proper tax planning, could you end up leaving a huge tax liability?

In order to protect family and loved ones, it is essential to have provisions in place after you’re gone. The easiest way to prevent unnecessary tax payments such as inheritance tax is to organise your tax affairs by obtaining professional advice and having a valid Will in place to ensure that your legacy does not involve just leaving a large inheritance tax bill for your loved ones.

Effective inheritance tax planning could save your beneficiaries thousands of pounds, maybe even hundreds of thousands depending on the size of your estate. At its simplest, inheritance tax is the tax payable on your estate when you die if the value of your estate exceeds a certain amount. It’s also sometimes payable on assets you may have given away during your lifetime, including property, possessions, money and investments.

Inheritance tax is currently paid on amounts above
£325,000 (£650,000 for married couples and registered civil partnerships) for the current 2013/14 tax year, at a rate of 40 per cent. If the value of your estate, including your home and certain gifts made in the previous seven years, exceeds the inheritance tax threshold, tax will be due on the balance at 40 per cent.

Without proper planning, many people could end up leaving a substantial tax liability on their death, considerably reducing the value of the estate passing to their chosen beneficiaries.

Your estate includes everything owned in your name, the share of anything owned jointly, gifts from which you keep back some benefit (such as a home given to a son or daughter but in which you still live) and assets held in some trusts from which you receive an income.

Against this total value is set everything that you owed, such as any outstanding mortgages or loans, unpaid bills and costs incurred during your lifetime for which bills have not been received, as well as funeral expenses.

Any amount of money given away outright to an individual is not counted for tax if the person making the gift survives for seven years. These gifts are called ‘potentially exempt transfers’ and are useful for tax planning.

Money put into a ‘bare’ trust (a trust where the beneficiary is entitled to the trust fund at age 18) counts as a potentially exempt transfer, so it is possible to put money into a trust to prevent grandchildren, for example, from having access to it until they are 18.

However, gifts to most other types of trust will be treated as chargeable lifetime transfers. Chargeable lifetime transfers up to the threshold are not subject to tax but amounts over this are taxed at 20 per cent, with a further 20 per cent payable if the person making the gift dies within seven years.

Some cash gifts are exempt from tax regardless of the seven-year rule. Regular gifts from after-tax income, such as a monthly payment to a family member, are also exempt as long as you still have sufficient income to maintain your standard of living.

Any gifts between husbands and wives, or registered civil partners, are exempt from inheritance tax whether they were made while both partners were still alive or left to the survivor on the death of the first. Inheritance tax will be due eventually when the surviving spouse or registered civil partner dies if the value of their estate is more than the combined tax threshold, currently £650,000.

If gifts are made that affect the liability to inheritance tax and the giver dies less than seven years later, a special relief known as ‘taper relief’ may be available. The relief reduces the amount of tax payable on a gift.

In most cases, inheritance tax must be paid within six months from the end of the month in which the death occurs. If not, interest is charged on the unpaid amount. Inheritance tax on some assets, including land and buildings, can be deferred and paid in instalments over ten years. However, if the asset is sold before all the instalments have been paid, the outstanding amount must be paid. The inheritance tax threshold in force at the time of death is used to calculate how much tax should be paid.

Inheritance tax can be a complicated area with a variety of solutions available and, without proper tax planning, many people could end up leaving a huge tax liability on their death, considerably reducing the value of the estate passing to chosen beneficiaries. So without inheritance tax planning, your family could be faced with a large tax liability when you die. To ensure that your family benefits rather than the government, it pays to plan ahead. As with most financial planning, early consideration and planning is essential.

Making a Will

Posted on April 30, 2013 by - Uncategorized

Providing peace of mind that your loved ones
can cope financially without you

A Will is an essential part of your financial planning. Not only does it set out your wishes, but, die without a Will, and your estate will generally be divided according to the rules of intestacy, which may not reflect your wishes.

This can be particularly problematic for unmarried couples, as the surviving partner doesn’t have any automatic rights to inherit, but it can also create problems for married couples and registered civil partners.

Married partners or registered civil partners inherit under the rules of intestacy only if they are actually married or in a registered civil partnership at the time of death. So if you are divorced or if your civil partnership has been legally ended, you can’t inherit under the rules of intestacy. But partners who separated informally can still inherit under the rules of intestacy.

No one likes to think about it but death is the one certainty that we all face. Planning ahead can give you the peace of mind that your loved ones can cope financially without you and, at a difficult time, helps remove the stress that monetary worries can bring.
Planning your finances in advance should help you to ensure that, when you die, everything you own goes where you want it to. Making a Will is the first step in ensuring that your estate is shared out exactly as you want it to be.

If you leave everything to your spouse or registered civil partner there’ll be no inheritance tax to pay, because they are classed as an exempt beneficiary. Or you may decide to use your tax-free allowance to give some of your estate to someone else or to a family trust. Scottish law on inheritance differs from English law.

Good reasons to make a Will
A Will sets out who is to benefit from your property and possessions (your estate) after your death. There are many good reasons to make a Will:

• you can decide how your assets are shared – if you don’t have a Will, the law says who gets what
• if you’re an unmarried couple (whether or not it’s a same- sex relationship), you can make sure your partner is provided for
• if you’re divorced, you can decide whether to leave anything
to your former partner
• you can make sure you don’t pay more inheritance tax
than necessary

Before you write a Will, it’s a good idea to think about what you want included in it.

You should consider:

• how much money and what property and possessions you have
• who you want to benefit from your Will
• who should look after any children under 18 years of age
• who is going to sort out your estate and carry out your wishes after your death (your executor)

Passing on your estate
An executor is the person responsible for passing on your estate. You can appoint an executor by naming them in your Will. The courts can also appoint other people to be responsible for doing this job.

Once you’ve made your Will, it is important to keep it in a safe place and tell your executor, close friend or relative where it is.

It is advisable to review your Will every five years and after any major change in your life, such as getting separated, married or divorced, having a child or moving house. Any change must be by ‘codicil’ (an addition, amendment or supplement to a Will) or by making a new Will.

Long-term care funding

Posted on April 30, 2013 by - Uncategorized

Greater clarity on how much care in ‘old age’
may cost

In his Budget speech delivered in March 2013, the Chancellor, Mr Osborne, said this was a Budget for ‘an aspiration nation’. He explained this meant ‘helping those who want to keep their homes instead of having to sell it to pay for the costs of social care.’ The confirmation of a £72,000 cap on social care costs provides long-term savers with a greater idea of future spending, but doesn’t cover additional costs incurred in a residential care home.

Cost of care
Savers who were hoping that the Budget 2013 announcement around social care would provide greater clarity on how much their ‘old age’ may cost them could be disappointed to find out that they will still have to foot the bill for uncapped ‘hotel costs’ incurred in a care home, such as food and board.

Means-testing limit
Despite an increase in the means-testing limit covering total care costs (social care and ‘hotel costs’) to £118,000, many whose estate is worth more than the limit will have to pay for the bill themselves. This means the majority of home owners will still find themselves in the uncertain position of not knowing how much their old age will cost.

High care home fees
People may be surprised that the social care cap does not cover their total care bill. This will result in many pensioners and elderly people having to prepare for high care home fees. Some may even find themselves in the unfortunate position of having to sell their assets to fund their old age. It is important for those who find themselves near or over the means-testing threshold to prepare for the financial burden that may be placed upon them to avoid undesired consequences.

Will you be left to pick up the pieces?
The future of social care is one of the most important issues facing the country. All too often the NHS and families are left to pick up the pieces when older people fail in their struggle to cope alone. If you are concerned about how this could impact on you or a family member, please contact us to review your requirements.