There are some areas of tax and financial planning that your clients ask you about and some where you have to be proactive to generate interest.
Inheritance tax was for many years one of those taxes that had to be promoted to secure interest. Over the past few years, the tide has turned. Indeed, the sea has changed.
Inheritance tax is something that really concerns people. People with houses, people with businesses, people with investments and people with all these assets.
As a result, the inheritance tax planning market has been relatively buoyant but let us not get carried away – not everybody is worried about inheritance tax, even if they do own all or some of the assets specified above.
Interest in and anxiety over IHT (as it is known in the trade and beyond) is not surprisingly most commonly found in the over-60s. For many reasons, this is a highly attractive segment of the market for financial planners so no worries there.
Someone recently asked me where the H in IHT came from and I could only reply that it was to distinguish the tax from the IT acronym which is associated most commonly with information technology and, somewhat less so, income tax.
The reason for the H aside, the interest in IHT planning has spurred many advisers to become more deeply involved and product providers (mostly but not exclusively UK and offshore insurers) to develop packages to deliver to a target market that wants to consider accessible gifting.
The change in the rules in 2006 means that lifetime transfers to all trusts, other than bare trusts and certain trusts for the disabled, will be chargeable lifetime transfers and this brings with it the need to consider not only the relevant property regime, incorporating entry, periodic and exit charges, but also the need to report certain transfers to HM Revenue & Customs.
Very recently, we have seen what some may consider to have been misleading headlines on the front page of a national newspaper incorporating the words “crackdown” and “inheritance tax”. I will be looking at this in more detail in a later article but suffice it to say that the announcement in August’s HMRC IHT and trusts newsletter of what amounts to a “limited time” review of form IHT 200, with close attention being paid to lifetime transfers made within seven years of death, hardly amounts to a crackdown. It is more like intelligence gathering that may lead to further action and possibly legislation.
Regardless of the outcome, IHT was once again front-page news and it is impossible to dispute that this kind of publicity further raises awareness of and interest in IHT planning.
In a prior action, HMRC on July13 published proposals to increase significantly the reporting levels in connection with chargeable lifetime transfers and comments on the proposals were invited before the end of August.
Before considering these, let us have a look at what the current rules are. I will look at lifetime chargeable transfers and then periodic and exit charges.
Lifetime chargeable transfers
For a lifetime chargeable transfer, such as a gift into a discretionary trust, the donor must report the transfer on form IHT 100, normally within 12 months from the end of the month in which the transfer is made. A report is always required unless the transfer is an excepted transfer, which means:
- The value transferred together with the value of any previous chargeable transfers during the same tax year does not exceed £10,000 and
- The value transferred together with the values of all previous chargeable transfers during the 10 years preceding it does not exceed £40,000.
Periodic and exit charges for relevant property trusts
IHT 100 and supplementary event forms must be completed on the 10-year anniversary of a relevant property trust (that is, a trust subject to the IHT discretionary trust regime) and on any transfer out of such a trust. The same 12-month time limit described above normally applies. There are currently no minimum reporting thresholds but returns are not required for a trust whose sole asset is cash and whose value does not exceed £1,000.
The effect of these rules is that all but the smallest chargeable lifetime transfers need to be reported and that many relevant property trusts have to make returns reporting that no tax liability has arisen.
This used to be a minor irritant because chargeable lifetime transfers were rare and the relevant property regime was confined to discretionary trusts. That state of affairs was changed by the Finance Act 2006 reforms, which mean that most new lifetime trusts, other than bare trusts and certain trusts for the disabled, are within the relevant property regime and lifetime transfers into them are chargeable.
HMRC does not want to be inundated with returns when no tax is due and equally its “customers” do not want to fill out pages of seemingly pointless paperwork. The problem was acknowledged shortly after the 2006 Budget announcement but it took HMRC over a year to put together its proposals, which it plans should take effect from April 6, 2007 in respect of transactions on or after that date.