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's publication.
The Labour Party in opposition made no secret of its hostility to the Conservative Government's 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's 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?
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't 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's £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.
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.