View more on these topics

Case Study: The best options for IHT planning

Which IHT strategies have been confirmed as exempt from the Government’s crackdown on artificial tax avoidance?

murphy

The problem: A client is looking at mitigating an IHT liability but is nervous about the government’s crackdown on artificial avoidance strategies. Which strategies have been confirmed as falling outside the scope of the Government’s crackdown?

The nil rate band  for inheritance tax has been frozen at £325,000 since 2009/10 and the recent Budget confirmed it will remain frozen at this level up to and including the 2017/18 tax year. The effect will be that more and more individuals will be falling into the IHT net in the next few years and many will therefore be looking for help in mitigating the tax.

Tried and tested lump-sum planning techniques will continue to be popular and, in that respect, there is some good news. HMRC has recently issued further guidance in the form of a whole range of examples concerning types of planning that it will not view as ‘abusive’ under the terms of the general anti-abuse rule, which will come into force when Royal Assent to the Finance Bill is given, currently understood to be 17 July this year.

One planning area is the use of discounted gift trusts. It is no surprise that HMRC does not consider DGTs to fall within the scope of the GAAR. Use of such arrangements has been commonplace for many years and, back in 2007, HMRC even issued a technical note to product providers which set out how they expected providers to operate arrangements of this type. Nevertheless, one of the problems with the GAAR is that there will be a lack of certainty about what type of planning will be deemed to be acceptable by HMRC; as such it is always a comfort to learn that planning of a particular sort will not be affected under the GAAR.

Another area of planning deemed to be outside the scope of the GAAR is the well-known strategy based on the ‘Rysaffe’ principle incorporating ‘pilot trusts’.

A typical example using planning of this nature would be where an individual sets up various discretionary trusts on different days, each for a fairly modest amount, such as £100. Each trust would then have its own nil rate band for IHT purposes.

On death, the individual’s will states that much larger amounts (say £200,000) are left to each discretionary trust. On the 10 year anniversary of each trust, provided that the value of each trust is within the nil rate band current at that time, there will be no 10 yearly IHT charge to pay. Planning of this nature relies on the decision in the case of Rysaffe Trustee v IRC [2003].

This was a case which HMRC lost and, as the law has not been changed subsequently, the example states that HMRC must be taken to have accepted the practice and cannot therefore regard it as abusive. This means that planning using the Rysaffe decision in connection with trusts of protection planning, pension death benefits and investment bonds (especially loan trusts) can continue.

A further piece of good news on the IHT planning front involves persons with non-UK domiciled spouses. Since 6 April 2013, the exempt amount for transfers from a UK domiciled spouse to a non-UK domiciled spouse has increased substantially from £55,000 to £325,000. This means that, since that date, an amount of up to £650,000 can be transferred to a non-UK domiciled spouse without there being any liability to IHT.

Also since 6 April 2013, it is possible for a non-UK domiciled spouse to make an election to be treated as UK domiciled for IHT purposes. If such an election is made, then the normal spouse exemption will apply in full to all transfers made to the previously non-UK domiciled spouse.

With IHT planning continuing to be a focus for some clients it remains vitally important for advisers to keep up to date with developments in this area.

Brian Murphy is financial planning manager at Axa Wealth

Recommended

7

Miliband attacks Govt’s lack of action on pension charges

Labour leader Ed Miliband has attacked the lack of action in the Queen’s speech on tackling high pension charges as well as payday loans. The Government yesterday set out its legislative agenda for the year with bills on long-term care funding, pensions reform and deregulation. In a debate in the House of Commons following the […]

1

Bestinvest looks to double assets to £10bn through acquisitions

Bestinvest chief executive Peter Hall says he is looking to double the company’s assets under management to $10bn within the next five years by acquiring a number of large firms. The investment advisory business currently holds around £4.7bn in assets under management on behalf of more than 50,000 clients. Speaking to Money Marketing, Hall says he […]

2

Lloyds cuts 850 jobs

Lloyds Banking Group is cutting around 850 jobs as part of the bank’s ongoing strategic review. Cuts are being made across the business including Lloyds’ commercial banking, retail, group operations, and group executive functions divisions. Other affected divisions include finance, insurance and wealth, asset finance and international. The bank says around 275 roles are also […]

Business-People-Walking-Motion-Leaving-Beige-700x450.jpg

E&Y: 3,000 to quit advice during 2013

Ernst & Young says adviser numbers will drop to 20,000 this year, while life companies have experienced “slow” new business figures post-RDR. The firm estimates there were around 23,000 advisers at the start of 2013 – a number which does not include the decision by HSBC and Santander to exit mass market advice earlier this […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment