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Fuel for thought on IHT

The Chancellor&#39s autumn statement this week is lik ely to be of particular interest because of his awaited thoughts on fuel duties. But perhaps of more professional relevance to many IFAs is the question of whether the statement is likely to contain any dramatic news about inheritance tax.

If no such dramatic ann ouncements are made, then this appears to be the ideal time to start the IHT planning process which often creeps on to our timetables at the 11th hour in February or March.

It is not completely out of the question that the autumn statement could contain the announcement of immediate changes to the IHT regime. Indeed, there was an example of this last year, when significant changes to the capital gains tax regime involving offshore trusts were ann ounced with immediate effect.

Such announcements are generally made to shut down tax planning schemes which the Inland Revenue perceives to be an abuse of the system.

The legislation implementing the change does not appear until the following Finance Bill, leading to planning blight for advisers who are un able to advise in the light of these unpublished, though effective, changes to the law.

Even if no dramatic ann ouncements are made of immediate changes to a particular area, it may be that the Chancellor could ann ounce a more widespread review of inheritance tax.

While this is a possibility, the current Govern ment has a track record of consultation where major reviews of particular taxes have occurred.

Any wide-ranging reform of IHT might be expected to be announced in advance with the announcement being followed by the publication of a consultation document.

It may be unlikely that such an announcement would be made at this point in the electoral cycle, both because of the political damage this might do the Government and also because of the length of time req uired to implement reform.

Once any immediate changes have been assimilated, IFAs can begin to think about starting IHT planning activities.

Even if it is not expected that major changes to IHT rules will take effect next March, it is probably still worth considering IHT planning under the current regime.

One reason for looking at planning on a regular basis is that this allows use to be made of the annual £3,000 allowance. This is the amount that each person can gift annually completely free of IHT.

As any unused allow ance can only be carried forward for one year, it is worth making sure that this allowance is used before looking at other planning tactics.

The second reason for looking at planning on a regular basis is that, where planning involves the use of potentially exempt transfers, it is worth making these gifts earlier rather than later.

This will hopefully inc rease the likelihood that the individual will survive the seven-year run-off per iod for potentially exempt transfers and will increase the likelihood that, even if a death happens within the seven-year period giving rise to a tax liability, the liability will be reduced by the effects of taper relief. Add itionally, where the potential tax liabilities are to be covered by insuring the liability, early gifts will hopefully be covered at a lower cost.

Where planning is considered, one reason for starting such planning early in the tax year is that there are some planning activities which require thought well in advance of the date of a planned gift.

An example of this might be where the individual decides to implement a tax planning activity involving, say, the gifting of a loan note related to a transfer of residential property. Such a gift could only be made after the appropriate conveyancing had been carried out.

Another situation where thinking ahead is required is where assets are not in a liquid form and need to be realised before IHT planning can take place.

An example is where shares are held at present. Time will be req uired to calculate any consequential capital gains tax liabilities and perhaps undertake activities to miti-gate this tax.

While this might be a surprising idea, there are some planning ideas where it is already too late to take certain steps before the next Budget. Such an example may be where one spouse transfers an asset into trust for the benefit of the other spouse, the intention at this point being an equalisation of the estates.

Following a period where the spouse enjoys his or her interests under the trust, the trustees might con sider terminating the interest in favour of other beneficiaries – creating a Pet for this disappointed spouse.

While creating such a trust and equalising estates may be a sensible tactic prior to the next Budget (in case of a sudden with drawal of the inter-spouse exemption), the trustees would be unlikely to be considering any termination of the receiving spouse&#39s interest prior to the Budget.

This is because any such termination might be seen as precipitous, giving rise to possible arguments that the transfer to the spouse was not a genuine transfer but merely an artificial step inserted in a tax-avoidance transaction.

As well as these reasons for undertaking IHT planning in good time, there may be additional reasons this year for taking planning steps early. Perhaps the end of 2000/01 will see an unusual focus being given to pension planning as the stakeholder rules loom, with less time than usual being available for capital tax planning.

The period following the aut umn statement and the run-up to the final submission date for the 2000 tax return, may be an ideal time to take advantage of the high level of awareness of tax issues and undertake some IHT planning.


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