From Gill Steele Head of Financial Planning Department I am writing in connection with the Wealth Wa...
From Gill Steele
Head of Financial Planning Department
I am writing in connection with the Wealth Warning article in Cover's Healthy Wealthy & Wise Autumn 2000 supplement which I received.
There are a number of important points that the article does not note.
The article comments on Tax Relief 'only kicking in three years after the gift was made'. The important point here is that on a potentially exempt transfer (PET) up to the value of £234,000, they will fall into the nil rate band and the tax rate on them will be 0%. Taper relief on 0% is therefore nil, so it does not apply.
It may be worth noting that taper relief will apply if cash gifts to the value of the nil rate band have already been given away within the last seven years. For this reason, a gift inter vivos policy is basically useless to meet this liability and a level term assurance may be closer to best advice.
The article also states that any trust for a term assurance policy is a legal document prepared by a solicitor. All life companies will provide a flexible trust document for completion.
Regency Financial Management also stated that you can put £100,000 into a trust and still retain the £5,000 of income it generates. I do not believe this is the case, as retaining the interest from a trust is a gift with reservation. The Inland Revenue therefore deems it to have never left your estate and the trust is unable to be used in the way envisaged. Perhaps Regency Financial Management is referring to a gift and loan scheme written to trust?
In the case study of Joe and Margaret Maxwell, I think it would have been helpful to say that the Maxwells have £634,000 of investments (the reader has to work out where the £280,000 Life Assurance policy fits in).
The recommendation from the IFA of a long-term plan states that this will pay out "for care should they need it in later years." The proviso that we always tell clients is in the case of a valid claim being made. In other words, it will not pay out should clients need to go into a nursing home because of frailty and also if they do not fail any activities of daily living.
I think it would have been helpful to have a note in the article stating that tax planning via a will can use both lots of the £234,000 nil rate band, and that one is not lost on the first death. By holding some of the assets within the first nil rate band on the first death, the surviving spouse can enjoy income without the penalty of IHT on the remaining capital. In the case of the Maxwells who have total assets worth £934,000, they might require a whole of life policy with cover of £186,400.
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