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And the band played on

The clarification by the Conservatives of their proposal to increase the nil-rate band for inheritance tax to £1m was well reported when made only a few weeks ago. Since then, we have had some more serious issues to consider in the shape of the extreme financial turbulence experienced over the past few weeks and it would be something of an understatement to say that most of us have been too preoccupied by events on both sides of the Atlantic to give too much thought to IHT.

Many basic assumptions have been shaken and what once seemed certain no longer seems that way. The safety of one’s capital and the robustness of the banking system are two fundamental concerns. Little wonder that IHT is unlikely to be top of the pile of client concerns at the moment.

However, life must go on. It is also true to say that the very falls in value that are causing such concerns are prospectively saving IHT at 40 per cent.

Be all this as it may, there is little denying that the Conservatives secured some excellent publicity for their proposed £1m nil-rate band just before the market cataclysm took place.

The £1m nil-rate band has reportedly been confirmed by a “Tory spokesperson” as being fully transferable in the same way as the current nil-rate band. In other words, raising the nil-rate band to £1m would not bring the abolition of transferability.

The introduction of a transferable £1m nil-rate band is, of course, subject to the satisfaction of two important conditions:

  • That the Conservatives are elected to power at the next general election.

  • That nothing changes, economically, fiscally or philosophically, between now and the next general election to necessitate this planned increase in the transferable nil-rate band to be shelved.

    Subject to these two important conditions:

  • What would be the possible implications for individuals and estate planners in a new “2 x £1m nil-rate band” world?

  • What, if anything, should individuals do now to plan for this possibility?

  • Are individuals’ attitudes towards estate planning likely to change in light of this Tory restatement of intent?

    Before answering these key questions, it is important to keep in mind the following relevant facts that give an indication of the number of individuals that these proposals could affect:

  • Around 44,000 estates actually paid IHT in 2007/08.

  • Land Registry figures show that fewer than 1,500 properties were sold for more than £2m in 2007. That is less than 0.15 per cent of total properties sold.

    The latter statistic is important as the value of the private residence is, for many, the main reason they have an IHT liability, despite the recent slowing of increases in value and, in some cases, stalling or falling values.

    Many have commented that if the £1m nil-rate band is introduced, there is perhaps a strong likelihood that a significant number of couples and individuals may feel that IHT planning is no longer necessary.

    To anticipate the effect that a £1m nil-rate band could have on planning activity, one could do worse than extrapolate the impact that the transferable nil- rate band has already had.

    In the light of the Tory proposals, it may be necessary for advisers to give some consideration to the possible effects of the proposed increase for:

  • Single persons.

  • Couples.

    When considering these possible effects, it is important to keep in mind that the current depression of asset values, especially residential property, may contribute to a possible perceived reduced need to plan that will be added to by the “carrot” of a potentially significant increase in the transferable nil-rate band.

    I will look at the factors to take into account in giving advice in succeeding articles.

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