Q. I have heard a rumour that the income tax personal allowance is set to be increased to £10,500 in the forthcoming Autumn Statement. Is this correct?
A. There is no telling what measures the Chancellor, George Osborne, will announce when he delivers his Autumn Statement (and there has been an unusual lack of advance briefing ahead of the Autumn Statement compared to recent years).
The annual allowance is set to increase to £10,000 with effect from 6 April 2014 and I should be surprised if it is increased further in this year’s Autumn Statement. However, the Deputy Prime Minister, Nick Clegg, stated recently that he was keen to see the personal allowance rise to £10,500 by the end of the current parliament (the next election must be held by 2015) and a number of newspapers have reported that George Osborne is amenable to the increase (especially as he comes under pressure from Tory backbenchers to cut taxes ahead of the next election).
However, if an increase to the personal allowance is to be announced, I suspect that this will not occur until next year’s budget (in order to afford the Chancellor the time to assess how the £1billion cost will be funded).
The Autumn Statement, originally scheduled for Wednesday 4 December, is due to be delivered on Thursday 5 December.
Q. My father, who was divorced, died recently and left his entire estate to me (as I am an only child). His estate is valued at approximately £300,000 and I had therefore assumed that there would be no inheritance tax to pay. However, his executors have informed me that, because my father made a cash gift to me of £250,000 more than six years ago (in order to help me buy a house), I have to pay almost £100,000 in inheritance tax. Is this correct?
A. First, I am sorry to hear of your loss.
Ordinarily, assets up to the value of £325,000 can be transferred upon death without triggering a liability to pay inheritance tax (“IHT”). This is known as the “nil-rate band”. Nil-rate bands are transferrable between spouses, which means that on the death of the second spouse their estate will, ordinarily, have to be valued in excess of £650,000 before IHT becomes due.
If a deceased’s estate is valued at more than £325,000 (or £650,000 in respect of the estate of a surviving spouse), IHT is payable upon the amount in excess of the nil-rate band. The current rate of IHT is 40%. For example, therefore, if the estate of an individual were valued at £500,000, IHT of £70,000 would be payable (i.e. 40% of £175,000, being the value of the estate in excess of the nil-rate band).
I can understand why, therefore, you might be surprised that IHT is payable in respect of your father’s estate. However, when assessing the value of a deceased’s estate, executors must take account of any gifts made within seven years of death.
When a person makes a gift during their lifetime, such as your father’s gift of £250,000 to fund the purchase of your home, it is known as a “potentially exempt transfer” (or “PET” for short). If the person making the gift survives for seven years, then the gift is outwith their estate. However, if they die within the seven year period, as is the case in respect of your father’s estate, then that gift forms part of the deceased’s estate and has the effect of reducing the nil-rate band available to a deceased’s estate by an equivalent amount.
Therefore, in the example you have provided, the nil-rate band available in respect of your father’s estate is effectively £75,000 (the failed PET having accounted for the first £250,000 of the nil-rate band). Therefore, you are correct that your father’s estate will have an IHT liability of circa £90,000. This may be reduced in the event that your father had annual gift allowances available which may have the effect of reducing the value of the failed PET.
If you have any concerns that you may not be paying the correct amount of IHT in respect of your father’s estate and/or you believe that your father’s estate is not being administered in a tax-efficient manner, I urge you to seek advice from a solicitor who specialises in private client/estate planning.
Q. I am a trustee of a final salary pension scheme. The employer has proposed making an “asset backed contribution”, which seems like a good deal for both the scheme and the employer. However, a fellow trustee has cautioned that the Pensions Regulator has outlawed such contributions. Is this correct?
A. No.
Asset backed contributions (“ABCs”) are, essentially, a pledge of assets (such as a factory or cash flows) that become the property of the scheme in the event of the employer’s insolvency. ABCs have become more popular in recent years and are a legitimate form of scheme funding. They enable an employer to reduce the amount of cash contributions it makes to a scheme and can minimise a scheme’s PPF levy (the annual premium paid to fund the government’s “lifeboat” scheme that protects members’ benefits, up to a cap, in the event of an employer’s insolvency).
However, recently the Pensions Regulator (“TPR”) urged trustees to exercise caution when accepting ABCs. TPR suggested that many ABCs do not offer “the advertised level of additional security”, can be extremely complex in their structure and often carry very large adviser fees. I suspect that it is this warning (and not a ban) to which your colleague refers.
If you have any doubts as to whether the ABC proposed by your scheme’s employer represents good value to your scheme and its members, I recommend that you raise the issue with your scheme’s pension consultant.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
0191 217 3340
