View more on these topics

Finger on the heir trigger

Chancellor Gordon Brown surprised the tax planning industry when his first post-election Budget in July failed to tighten up on inheritance tax avoidance. But tucked away in the details was a promise to publish a consultation document on tax reform before the next Budget.

That paper will now be published on November 25 and fears are growing that, if proposals contained within it become law, they will be dated from the date of the paper&#39s publication.

The Labour Party in opposition made no secret of its hostility to the Conservative Government&#39s progressive relaxation of inheritance taxes, which had made IHT an almost voluntary tax, paid by only 14,000 people last year and yielding only 1.5 per cent of total Government revenues (see graph).

Although its manifesto made no explicit recommendations, Labour contrasted its approach with "the Tory goal of abolishing capital gains and inheritance tax, at least half the benefit of which will go to the richest 5,000 families in the country".

No one, of course, can be sure what Mr Brown&#39s paper will include. A Treasury spokesman dismissed reports so far as "pure speculation". But Maurice Fitzpatrick, a taxation specialist at accountants Chantrey Vellacott, says: "I think there will be significant changes and my advice is to plan sooner rather than later. The Inland Revenue can issue a press release in which changes are effective from the date of the release. It does not have to wait for the Financial Bill."

So how can IFAs advise clients to avoid IHT but remain within the existing rules?

GIFTS

The commonest form of protecting assets from IHT is by mak ing gifts while alive through potentially exempt transfers. Gifts are free from IHT as long as the person making the gift does not die within seven years.

Speculation is growing that the Chancellor may revive the old capital transfer tax provisions, abolished in 1986, whereby all gifts are added up and made liable for IHT if the total exceeds the IHT threshold.

Don&#39t imagine, however, that clients can give their homes to their children and continue to live in it to avoid further IHT.

This is treated by the Revenue as a gift with reservation and is liable for IHT.

A DEED OF VARIATION

This is a little-known rule that allows a will to be rewritten if all the benefic-iaries agree within two years of the death.

Tax specialists have used this to revise wills which were poorly written from an IHT perspective.

For example, a man leaves his wife £500,000 in his will. Married partners are exempt from IHT, so no tax is paid. But she then dies a year later and her children are left the £500,000 – and then a £114,000 tax bill on the estate.

Using a deed of variation, the will is rewritten so that the £500,000 left to the wife changes to £215,000 and the balance is paid into a discretionary trust for the children. On her death, her estate is not taxed, as it does not exceed the IHT threshold, while the children&#39s £285,000 trust faces a tax bill of only £8,000. By rewriting the will, the children cut the inheritance tax bill by £86,000.

PROPERTY

Business and agricultural property is exempt from IHT. This has led to people buying farms to escape tax and, at the very least, Labour is expected to cut the relief, taking it from 100 per cent to, say, 50 per cent. Sidestepping a cut in relief will be difficult.

Recommended

Costs of regulation

Am I seeing news management in action or what? The headlines seem to applaud the PIA for freezing regulatory costs for members and we are meant to be eternally grateful for this small mercy. But has anyone looked behind the scenes at the sleight of hand that has been performed? The overall costs associated with […]

Britannia to pay out £39m in loyalty bonuses

Britannia Building Society is sharing out £39m to over a million members as part of its loyalty bonus scheme. The payout is a £4m increase on last year&#39s first loyalty reward. It comes despite a 15 per cent drop in Britannia&#39s profits to £48.8m for the first six months of last year. Its full-year results […]

Briefs

Would you support a product levy to partly fund the Investors&#39 Compensation Scheme? “It is probably the only fair way of doing it. It certainly would have my support.” Peter French, Troy French & Partners “It is outrageous. The cost of compensation would not fall on the people who have caused the problems. I would […]

IFA apathy could scupper vote on Fimbra wind-up

Apathy among Fimbra members could hold up the PIA&#39s latest bid to kill off Fimbra, a leading councillor is warning. The PIA has mailed voting slips to 3,600 IFA firms which are still Fimbra members in a second attempt to wind up the regulator. But supporters of the plan, including Fimbra councillor Nick Conyers, fear […]

India correction: a terrific entry point?

By Kunal Desai, head of Indian Equities, Neptune A key concern for investors who were looking at India afresh has been the rich valuations and strong prior performance. We view the correction in the market through short-term growth concerns from demonetisation as a terrific entry point for the long-term investor. Investors should not be overly concerned […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment