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Be flexible

Since the present Government first came to power, there has been an (understandable) underlying expectation that “something would be done” about inheritance tax. Well, short of increasing the nil rate band in successive Budgets, nothing much has happened.

The marketers and advisers on the proliferation of largely (if not exclusively) insurance-based inheritance tax plans are especially interested in trying to glean any shred of evidence of Government thinking on inheritance tax reform. There is precious little to be had it would seem.

In the lead-up to any Budget, any “sell by” or “buy by” campaigns are to be viewed with great suspicion. When it comes to inheritance tax planning ahead of a Budget, especially where there is little or no hard evidence of any proposed changes, the key must be to maintain flexibility.

In many cases, the only act-ion a potential change ought to provoke is an acceleration of what was the right thing to do anyway. For example, if an opportunity to plan to reduce inheritance tax is to be closed, then this could act as a catalyst for those who, to date, had been procrastinating on the assumption that the opportunity would always exist.

This would represent the classic “sell by” opportunity for the purveyors of the means of taking the opportunity. In the past, we have seen the expected removal of life assurance premium relief trigger a “buying feast” of qualifying policies that generated the relief if bought before a certain date.

We have also seen (pretty consistently) activity in the pension market, with the lingering threat (often more perceived than real) of the removal of higher-rate tax relief on contributions. Most recently, we have seen much activity related to using up unused relief, which will no longer be possible after January 31 under a personal pension plan, by carryback of contributions to tax year 2000/01.

Any hint of action against a particular type of inheritance tax plan might prompt similar action from those to whom any such scheme seems appropriate. In some cases, an expected change will make a course of action that was otherwise inappropriate become appropriate. An example of this kind of change would be where, say, a tax, for example, inheritance tax, was considered (pre any potential change) to be relatively “soft”, perhaps in relation to a particular asset such as business or agricultural property.

In the light of this “softness”, planning may be considered to be not worthwhile. This has certainly been the case with regard to business and agricultural property since the introduction (subject to the satisfaction of the necessary conditions) of 100 per cent relief.

If either or both of business property relief and agricultural property relief were to be made less attractive, then IHT planning involving these assets may move up the agenda. In opposition, the Labour Party expressed some concern, in particular, over 100 per cent agricultural property relief, at least for non-working agricultural property owners.

If one were sure in advance that changes were likely, then those potentially affected might be inclined to make use of the current relatively benign reg-ime to make gifts. But, of course, it is not that easy. For one, it is impossible to be sure that any change is going to be introduced. If there is a reasonable degree of uncertainty and, aside from the potential change, the course of action being contemplated (for example, a lifetime gift) would not be made, then one would have to think very hard about the merits of carrying out any such planning.

One should never take financial action based on tax grounds alone. And when it comes to inheritance tax planning, this is particularly true.

Comfort with the loss of beneficial ownership (some say in legal ownership can always be secured through the use of a trust) should always exist before a gift is made and the potential capital gains tax cost must always be counted either in the shape of tax that could be triggered by the disposal or the lack of “tax-free uplift” in base value occurring on death. This could be particularly relevant for older donors.

When it comes to pre-Budget activity connected with insured inheritance tax plans, then before taking action one needs to consider:

The risk (if any) connected with the plan – in particular any known Capital Taxes Office “interest” or, more positively, correspondence (at the right level) or recently settled estates where the plan contemplated had been effected by the deceased.

Whether both the adviser and the client fully understand how and why the plan works and the extent of any risk that it may not achieve its purpose.

The level of legal control that the settlor can continue to exert the level of access to capital/”income” that can be maintained for the settlor.

The degree of flexibility that can be secured, in particular, whether the settlor can “wind the plan up” in whole or in part should either the tax planning need or the settlor&#39s or beneficiaries&#39 personal financial needs change.

All in all, a classic area for advice.


ABN Amro – North American Growth Fund

Wednesday 9 January, 2002 Type: Unit trust. Aim: Growth by investing in North American companies. Minimum investment: Lump sum £1,000, monthly £50. Investment split: Pharmaceuticals 13.3 per cent, cash 10.5 per cent, insurance 8.2 per cent, beverages 7.4 per cent, household products 6.5 per cent, communications equipment 5.8 per cent, IT consultancy and services 4.6 […]

Pavilion Asset Management – Socially Responsible Investment Fund

Wednesday, January 9, 2002.Type: Oeic.Aim: Growth by investing in 50-70 UK stocks.Minimum investment: A shares £500, I shares £1m.Investment split: 100 per cent in 50-70 UK stocks.Yield: 1.9 per cent.Isa link: Yes.Pep transfers: Yes.Charges: Initial A shares 5 per cent, annual A shares 1.5 per cent, Ishares 0.85 per cent.Special offer: Initial charge on A […]

Only a third have a pension says A&L index

Only one third of people have any type of pension according to the latest Alliance & Leicester Wealth Tracker Index.At 34 per cent this is a marginal increase from July, when it stood at 32 per cent. With only 29 per cent of women making provision, they lag behind the 40 per cent of men […]

Networks may face huge IFA review claims

IFAs could hit their networks with claims running into tens of millions of pounds over the cost of the pension, FSAVC and endowment misselling reviews, according to financial services law firm ProAct Legal.The law firm is writing to thousands of network members offering no-win-no-fee participation in a class action against their networks.ProAct principal Gareth Fatchett […]

Simon Fletcher

Auto-enrolment: pay attention or pay the price

By Simon Fletcher

As a chief executive officer of a business in the financial services sector, I have been dealing with the introduction of auto-enrolment for our clients for some time, but I can also speak from an employer’s point of view, having to go through the process ourselves.


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