View more on these topics

Don&#39t clock off before planning

There are a number of good reasons to undertake inheritance tax planning during an individual&#39s lifetime.

Before looking at these further, it is worth dealing with the argument that an estate can be varied after death, so that estate planning can be left until the 11th hour in all but the bigger cases.

This argument rel ies on the use of deeds of variation to change the way that assets are pas sed on death, whe ther they are passing under a will, acc ording to the rules of intestacy or by some other met hod, for example, join tly owned assets pas sing automa tically to the surviving owner.

What happens is that the original beneficiaries of assets create a formal document pas sing these assets to new beneficiaries, either directly or via a trust. As long as the document is created within two years of the death and the Inland Revenue is notified within six months of the document being finalised, the variation is treated for IHT and capital gains tax purposes as if the variation were a docu ment created by the deceased.

An example of a typical use of a deed of variation is the situation where a married man dies, leaving all his assets to his wife. This does not give rise to an IHT charge because a transfer bet ween spouses is exempt for IHT purposes. However, the joint estate will then pass on the wife&#39s death with the adv antage of only her nil-rate band. This means the husband&#39s nil-rate band is lost, with tax of up to £93,600 paid unnecessarily at current rates.

In these circumstances, a deed of variation might be used to redirect assets of up to £234,000 into a trust on the husband&#39s death. The wife can be a potential beneficiary of this trust, so that a tax saving can be achieved without completely ruling out the wife&#39s access to this capital.

There are two drawbacks to relying on the use of deeds of variation. The first of these is that the individuals who are making the variation must be able to sign the document. This could cause problems where the surviving spouse no longer has legal cap acity, perhaps by suffering from dem entia.

The second problem is that the tax effectiveness of deeds of variation can not be relied on, since they have come under att ack from Gov ernments of all hues.

In 1989, the Con ser va tive Government tried to pass legislation ending the tax efficiency of variations alth ough this was eventually dropped.

Variations have not yet been challenged directly by the current Gov ernment but are expected to come under attack. Such a minor amendment to the IHT regime is exactly the sort of measure that might be included in next year&#39s Budget.

Lifetime planning using trusts allows the individual to utilise reliefs which are perceived as generous and likely to be abolished or perhaps capped in future.

An example is bus iness property relief. This is a valuable rel ief for owners of tra ding enter prises and investors in unlisted trading com panies. As long as a qualifying business interest has been held for two years or more, the value of the interest will be covered by 100 per cent relief if the individual dies, so no tax will be charged on this asset.

Given the very generous nature of this relief, it is worth taking advantage of it while the relief is still available. Making a will passing the business interest to a suitable beneficiary will not achieve this, since relief will be given according to the rules that apply at the point of death.

A potentially exempt transfer is also inadvisable if the aim is to crystallise business property relief. This is bec ause the transfer is treated as exempt at the time of making the gift. Thus, no reliefs are taken into account. It is only if the person making the gift dies within seven years that the gift bec omes chargeable to tax. If the business property relief rules change in the mean time, relief may not be due.

Creating a discretionary trust is a helpful tactic in capturing business property re lief because it gives rise to a lifetime IHT charge and the avail abil ity of business property relief is tested immediately.

Importantly, the relief can be captured without any cost. This is bec ause, although the creation of the discretionary trust is a chargeable transfer, the business property relief will wipe out any IHT liability.

While Pets may not be useful in the case of business property relief, they can be a valuable opp ortunity in other areas of lifetime planning. A Pet which is suc cessful – where the ind iv idual making the gift surv ives for seven years – will fall completely outside IHT. So lifetime plan ning allows use to be made not only of the nil-rate band but also gives the opportunity to plan ahead and pass an unlimited amount to the next generation in a tax-efficient way.

Tax planning on death may result in a large amount of tax being paid unnecessarily. There is no substitute for lifetime planning to take adv antage of the excellent rel iefs and exemptions which make IHT a tax which can be largely avoided.


Jupiter Asset Management – Self Invested Personal Pension

Wednesday, 15th November 2000.Type: Full SIPP.Minimum investment: Lump sum £5,000, monthly £500. Minimum of £10,000 must be invested in Jupiter funds before investment in external funds can take place.Investment choice: Twenty one Jupiter funds &#45 income trust, high income, growth and income, monthly income, corporate bond, UK growth, UK special situations, UK smaller companies, environmental […]

Portman&#39s 5.99 per cent is cheapest on market

Portman Building Society has brought in the 5.99 per cent fixed rate mortgage. Aimed at first time buyers and remortgages, the mortgage is fixed for five years at 5.99 per cent for loans up to 95 per cent of valuation. At the end of the fixed rate period the mortgage will revert to Portman&#39s standard […]

Taking stock of alphabet soup

Improvements to IFA qualifications are an essential part of improving the industry&#39s reputation but they will not recapture public confidence on their own.FSA chairman Sir Howard Davies confirms the regulator will conduct an investigation into industry exams and there are several items on the agenda. The review, starting in January, intends to bring in fewer, […]

Keep IFAs sacrosanct

If you missed the last polarisation review, don&#39t worry, there will be another one along in a minute.This seems to be the first consequence of last week&#39s announcement from the FSA which was endorsed with indecent haste by the Treasury with no opportunity for comment. There will be the preliminary relaxation of rules on regulated […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm