Q. My wife and I have been informed that we stand to inherit a significant amount following the death of my wife’s aunt (who had no children and left her entire estate to us). My wife and I undertook some tax planning a few years ago, as our estate was already valued in excess of our combined nil-rate bands. We are concerned that this expected inheritance may negate that tax planning and cause our two children to have to meet a significant inheritance tax liability in the event of our deaths. A friend has suggested that we consider a deed of variation. Can you explain what this is and whether it may be appropriate for us, please?
A. First, I have too little information to be able to provide you with definitive advice and, in any event, this would not be the appropriate forum in which to do so.
A deed of variation is a legal document and would enable you to vary your wife’s aunt’s legacy either in favour of someone else (e.g. your two children) or into trust. A variation into trust would enable you and your wife to retain an element of control over the legacy and, if you wish, to even have access to those funds (by naming you and your wife amongst the beneficiaries). However, if you and/or your wife are a beneficiary under such a trust, you will be taxed on any income arising within the trust (as this would be considered a settlor-interested trust).
A deed of variation may also mitigate a potential inheritance tax liability as, provided certain criteria are satisfied, the variation is regarded as having been made by the deceased for the purposes of inheritance tax (and thus enables use of the deceased’s nil-rate band).
An alternative would be for you and your wife to disclaim a right to receive an inheritance from your wife’s aunt’s estate, although this is not an option that should be taken lightly. If you were to disclaim a right to receive an inheritance, you would likely forfeit the ability to choose who would benefit from that inheritance as it would fall into the residue of the estate and would be distributed accordingly. Your decision in this regard is likely to be influenced by whether your wife’s aunt stipulated that her estate should pass to your children in the event that you did not inherit and whether you wish to retain an element of control and/or an entitlement to that benefit.
As I am sure you will appreciate, this is a complex issue and you and your wife must take account of some very difficult considerations that may impact upon your future wealth and standard of living (as well as that of your two children). I urge you therefore to seek advice from a solicitor who specialises in estates/tax planning and, preferably, is a certified trusts and estates practitioner (“TEP”).
Q. I am a pensioner and I struggle to make ends meet (being in receipt of a state pension only). I caught a headline last week that suggested that the “triple lock” on state pension increases is likely to be scrapped. Can you explain what this is and whether it is likely to be abolished, please?
A. The state pension “triple lock” was introduced by the coalition Government in 2010. It guarantees that state pensions will increase each year in line with inflation, earnings or 2.5%, whichever is greater.
The triple lock was criticised recently by John McTernan, a political adviser to the Labour party and the former political secretary to then Prime Minister Tony Blair. Mr McTernan argued that the policy was “nuts, unaffordable and will not be sustainable” in light of economic forecasts that suggest that the European economy is likely to grow at less than 2 per cent per annum over the next decade.
However, whilst one cannot guarantee that a Government will not change its policies (especially with the Chancellor’s Autumn Statement due on 5 December), I would be surprised if the Government were to abolish the triple lock, at least not before the next election (due in 2015). Whilst none of the major political parties has committed to keeping the triple lock beyond the next election, all have expressed a desire to see it continue and many pensions commentators consider it crucial to the success of the government’s state pension reforms. I would be surprised therefore if the triple lock were abolished in the medium-term.
Q. I am the HR Director of a recruitment consultancy and I am responsible for my company’s compliance with the auto-enrolment regime. A colleague has suggested that we are likely to come under greater scrutiny from the Pension Regulator because of the industry in which we operate. Is this correct?
A. Yes, potentially.
The Pensions Regulator (“TPR”) is responsible for monitoring – and ensuring compliance with – the auto-enrolment regime. TPR announced a short time ago that it would conduct sector-specific compliance research to understand better how auto-enrolment is being rolled out across a number of industries and to ensure that employers are fulfilling their statutory obligations.
TPR has completed its first such project, focussed upon the recruitment industry. TPR has visited a number of recruitment businesses and interviewed leaders within those businesses. This is likely to result in sector specific guidance.
It is hoped that, by identifying and engaging with those sectors that face the greatest compliance challenges and who are likely to experience the largest opt out rates, TPR can assist those employers to comply with their duties, ensure that sufficient employees remain in their employers’ workplace pension schemes (and do not opt out) and avoid the need to exercise TPR’s draconian powers available to it in the event that an employer fails to comply fully with its obligations under the auto-enrolment regime.
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
