UK Inheritance Tax - Part 1

People have now got used to the changes that were introduced in April with the Finance (No. 2) Bill 2006. Amongst the things affected were the Accumulation and Maintenance Trusts (A&M) and the Interest in Possession (IIP) Trusts.
The new legislation now means that the A&M and IIP trusts would be subject to the ‘relevant property’ regulations in Chapter 3, Part 3 of the IHT Act 1984. This means that IHT could be charged on these types of trust on entry, periodically thereafter and on exit. If the trustees are UK residents then they have the responsibility to pay the periodic tax. If the trustees are based offshore then the charge will be down to the settlor.

With current A&M trusts, when it is understood that the assets in trust will go to a beneficiary when the individual(s) have reached 18 years of age or where the terms on which they are held before April 2008 to provide this then present IHT will continue. Where they do not then the trust’s assets will become ‘relevant property’ and the periodic and exit fees will apply. Also, it should be noted that the ten year anniversaries will be seen to start from the original date of settlement. As of April 2008, the first ten years the rate charges will show that the property was not ‘relevant property’ for a full 120 months. For example, if the first tenth anniversary falls in November 2008 then it will be a 20th of the usual cost.
With current IIP trusts the present regulations will apply until the interest in the trust property, as of 22nd March 2006, comes to an end. If someone should take absolute ownership this will be regarded as a transfer by the person with interest in the property - either a Potentially Exempt Transfer if they are still alive or a Transfer on Death - and will receive the same IHT scenario as present. The trust now has no IHT problems.
If the interest comes to an end so the property remains on trust then this will be treated as though the creation of new settled property has taken place if:
- it comes to an end during the lifetime of the person who is beneficially entitled to it. This will be a transfer creating ‘relevant property’ and will be charged on as soon as is possible unless it is for charity.
- the interest ends on the party being deceased as it will for part of the person’s IHT estate and the settled property will become ‘relevant property’ unless it is for charity.
In both cases the periodic and exit costs will be applicable. However, any new IIP that arises when started prior to 22nd March 2006 and finishes before 6th April 2008 will be regarded as an IIP that was in place on the 2006 date.

It can be seen from the above that people are going to need experienced advice from seasoned professionals.
The one thing that people never seem to remember is property. With the spiraling price of houses over the last decade, many people who would not have made the IHT threshold have suddenly become potential targets for Her Majesty’s Revenue & Customs (HRMC). Again, with good planning and depending on a person’s circumstances, it was easy to take care of this via things like discounted gift schemes using absolute trusts or discretionary trusts.
The first question is, “Will the old cope with the new (regulations)?” Due to the fact that most insurance plans are based on lifetime flexible trusts, the new regulations will apply. This means that there is a possible 20% IHT liability about to come into affect and up to a maximum 6% charge every ten years and when money leaves the trust. Three things must be remembered:
a) The order in which transactions happen may affect the amount of tax due
b) This only concerns plans based on flexible lifetime trusts. Gifts to Bare Trusts or individuals are not affected
c) The Nil Rate Band (NRB) will be vital when considering everything as it can affect what is due on the creation of an arrangement or ten year anniversary
The next question is, “How do I provide for all of this?” The easiest option is to cover any liability with a Life Assurance plan. It can either be a Whole of Life or Lever Term and should be written in trust for the beneficiaries. Under the new regulations, the payments made into the policy will usually be exempt. This is because they will come under the annual GBP3,000 exemption or the person can claim the regular gifts out of income exemption. However, if these cannot be used then the amounts will be chargeable transfers.
Most people need not worry as it will only be very big premiums that will go over the NRB. In fact, up to GBP40,000 can be paid without infringing upon it - over a seven year period. However, any amounts that are not exempt will have to be taken into consideration for other planning.
With regards to the periodic and exit charges there should not be anything to worry about as there is not a surrender value for any Level Term and it will not exceed the NRB when using the Whole of Life. Nevertheless, a cost could be incurred when:
* Benefits pay out just before the tenth anniversary and remain as cash in the trust at the time of the anniversary
* The insured is terminally ill as the policy can be seen to have a ‘market value’
* The policy has a surrender value and the NRB of the trust has been used up by previous chargeable transfers.
The best known schemes are retained interest trusts, loan trust and discounted gift trust. The idea of these is to reduce exposure to IHT whilst at the same time providing access to capital and avoiding the gift with reservation rules. This allows for the possibility of transferring unlimited amounts to loan trusts without having a chargeable transfer.
Any growth is automatically outside the settlor’s and beneficiaries estates. The periodic and exit charges will be based on the value of the trust fund minus any outstanding loans. With regards to discounted gift trusts, the discounted amount will be the important figure for the purposes of the entry charge. For those in good health, a large amount can be invested before an entry charge is levied, which is why it is such a good idea to begin IHT planning at a young age.
To be continued…

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]@mbmg-international.com

Snap Shots: by Harry Flashman

Bewildered about bracketing?

Read any good photographic book and you will read the word “bracketing”. With modern cameras being so good, almost intuitive if you read the publicity blurb (hint: don’t, but do read the manual), then why should bracketing still be necessary?
First off, let’s define bracketing. This is taking the same photo with three different settings. Basically, more light than you imagine is needed, the correct amount of light, and finally, less light than you imagine.

Now I do not really care how you gage the “correct” setting, whether you get it from the camera’s built-in light meter, or from a hand held light meter, the important factor is just that you do have a ‘starting point’ to work from.
I am also aware that most cameras these days do have a good metering system, taking readings from various points in the viewfinder and working out a good average, but you must remember that all the camera can do is give you a ‘good average’. This does not mean that it is the ‘best’ exposure.
There is much in the literature too about how good digital cameras are in problematical light situations. Surely the digital range is enough to get you out of trouble, under any situation? Simple answer is, No. If you are looking for a really good final image, you have to give the camera as close as you can to the ideal exposure for that picture.
There are also those who use film who say that it doesn’t really matter, close enough it good enough, because there is latitude in the film negative and latitude in the paper stock to still give you a satisfactory print. Simple answer is, No. You will get an image, but not necessarily a good image. There are limits in how far you can go away from the ideal.
What I am preaching here is that you should always try for excellence in your photographs. Do not think that if there is not enough light, then you can fix it all with Photoshop or other fancy computer technology. You can’t. It will end up as a trade-off between detail, brightness and contrast. And nothing beats correct exposure in the first place.
So we return to bracketing, one of the oldest methods of getting a properly exposed print. As stated above, you have to have a starting point, and what you have to do is to decide just what is the main element in the photograph you wish to take. Is it the person, or is it the countryside, or is it the building, such as the photographs with this week’s column? Having decided on the main element try and get a light meter reading from it. Even walk up close so that the main element fills the viewing screen and get your initial light meter reading exposure values. This is the starting point, so set you camera to the values indicated. Such and such f stop at so and so shutter speed. If you have metered correctly, then you will get an image that is close to perfect. But only “close”. To get that perfect exposure, now you bracket.
The easy way is to take two more shots, one set at half a stop “under” exposed and the other at half a stop “over” exposed. Now you can do this easiest by changing the f stop (aperture) by half a stop, as most lenses have the half stop increments, while the camera has full stops with the shutter speeds.
The three shots shown here were bracketed with one complete f stop increments, as it is always very difficult to estimate night scene exposures. As you can see, the one in the middle is best, though the brightest one is also acceptable. The dark one is throw away value only!
Nest time you are trying something just a little tricky - remember to bracket the exposure!

Modern Medicine: by Dr. Iain Corness, Consultant

Looking for the ‘eary’ warning system

My two year 10 month old burst into tears the other night, saying to her mother “Hoo jep!” She then turned to me, saying “Ear hurt!” While this parade of bilinguality was going on, there was one small two year 10 month old finger in her right ear. Up to the first joint.
As she has had a cough and cold recently, there were enough factors to satisfy all clinical diagnoses. This was most likely a case of Otitis Media, or middle ear infection.
Remembering the truism that it is the cobbler’s children that go barefoot, it is the doctor’s children that go untreated, and nothing had been done about Little Miss’ cough. However, I did have an auriscope at home that night and a very brief inspection of the offending ear drum showed the scarlet flare that results from infection behind the drum, in the middle ear.
Ear infections are actually very common in small children, and most ear infections involve the middle ear. By the way, we usually examine the “good” ear first, as the child is not apprehensive with the doctor examining that one, as there is no pain in it.
Babies and young children suffer more middle-ear infections than older children because the tubes connecting the middle ear to the throat (called the Eustachian tubes) are shorter and when the Eustachian tube is blocked, fluid does not drain very well from the middle ear to the throat, and air does not get up into the middle ear space as well as it should, providing an ideal breeding ground for all kinds of bugs.
Babies and toddlers may suffer intense ear pain and usually have a fever. There may also be vomiting, loss of appetite, decrease in energy and some loss of hearing. In some cases, the pus will break through the eardrum. This results in a thick yellow discharge from the ear. However, the child feels better when the ear discharges as the painful pressure is gone. The burst eardrum usually heals on its own, without any need for ear drum repair.
Going straight to the cause was not a case of brilliant diagnosis (though the plaudits of the crowd are always accepted) but purely the result of many years of experience. In any young child with those symptoms, one must always suspect and exclude the middle ear problems.
Why do they vomit with it? Probably for the same reason that people get sea sick - disruption of the normal fluid workings of the inner ear. Whatever, it is always worth asking your vomiting, febrile child if he or she “hurts” anywhere. If they point to or pull at the ear then you are most likely on the right track.
Remember that the middle ear infection does not necessarily produce an ear discharge as an initial symptom. For that to happen, it means the pus and goo trapped in the middle ear has ruptured through the ear drum. What we call a perforation, generally shortened to “perf”.
The treatment is a swiftly administered appropriate antibiotic. If the ear is discharging, then a culture can be taken and the exactly appropriate antibiotic chosen. If not, then most doctors fly by the seat of their pants and prescribe a penicillin derivative or one of the newer drugs. Some paracetamol to ease any pain and lower the temperature completes the package and expect junior to be better in a couple of days.
If your child gets recurrent middle ear infections, then you really should get this investigated - including an audiogram (hearing test) to ensure there is no lasting damage.
So just remember, Mums of the world, a temperature and vomiting may not necessarily mean an intra-abdominal problem. It could all be in the ears! Just remember the ‘eary’ warning signs!