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Income Tax Planning: what does that mean for my Will?

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By Caroline Foulger

Married couples are often advised, for Income Tax efficiency, that assets should be held jointly. Typically the division is 50:50 but sometimes it is heavily weighted to one party (say, 90:10) so that the lower rate tax payer receives most of the income from the asset, typically rental income, and overall this is taxed at the lowest rate possible.

There are potential tax efficiencies in doing this, but it can have quite wide implications elsewhere.

For example, for those in second marriages who have kept their finances separate until now (so that their respective children benefit from their respective estates). This can have huge inheritance implications, if Wills are not reviewed and appropriately updated.

In the event one person loses capacity, this joint ownership can create problems for the other joint owner, especially if the person who lacks capacity is the person with the bulk of the income entitlement. An Attorney under an Enduring or Lasting Power of Attorney cannot make gifts from the assets of the person whose affairs they are managing. It is therefore important that, if there is any cross-subsidy of income between a couple, any Power of Attorney is updated to reflect the expectation that their spouse will be supported financially in the event they lack capacity.

Planning for lifetime taxes often has an impact on both succession planning and Inheritance Tax planning. If you engage in any Income Tax or Capital Gains Tax planning, you should consider the effect that the related changes in beneficial ownership of assets between you and anyone else, may have on your Will or Lasting Power of Attorney.

With the general consensus being that taxation will be on the rise in light of the economic measures put in place to manage the impact of COVID-19, we fully anticipate that clients will be seeking lifetime tax efficiencies, but should bear in mind that it is important to consider the wider picture when making tax planning decisions.

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