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Gain from falls

The dark cloud of reduced asset values could have a silver lining for estate planners. Lifetime giving of assets that are thought to carry the prospect of increasing in value has always been high on the checklist of things to consider for estate planners.

But lifetime gifts will only ever be feasible in principle provided they will not harm the prospective donor’s income and capital needs.

Once this bridge is crossed, it will then be necessary to consider the tax cost, if any. For IHT, anything other than an exempt gift or an outright gift or a gift to a bare trust will be a chargeable lifetime transfer. However, provided this remains below the available nil-rate band (that is, taking account of chargeable transfers made by the donor within the immediately preceding seven years) no tax will be payable at that time.

Where tax is due, it will, broadly speaking, be charged at the rate of 20 per cent when made with a further 20 per cent payable if the donor dies within seven years of making the transfer. Keep below the nil-rate band and there will be no IHT cost.

But there is also CGT to consider. However, if a gift is a chargeable transfer for IHT (even if the transfer is wholly chargeable at the nil rate so that no tax is actually payable) the CGT can be deferred – that is, held over. Any transfer of any asset to a non-bare trust could qualify for this relief.

For exempt and potentially exempt transfers, the reduced asset values currently experienced may mean the capital gain (which for other than business assets cannot be held over) is much lower than it would have been a little while ago.

On tax grounds then, the time would seem to be propitious for a serious reconsideration of estate planning using lifetime gifts. But before getting carried away with the fiscal possibilities, it will be essential to establish the current income and capital needs of the would-be donor.

The very asset value reductions that give rise to the potential estate planning opportunities may make it harder for potential donors to give up capital, especially where it also produces income.

For any gift to be IHT-effective it is necessary to avoid the gift with reservation provisions. Some of the plans that have been developed to enable the donor to retain access to a flow of payments or capital sums (for example, loan trusts and discounted gift trusts) may well be suitable here. They may, at least, be worthy of consideration.

If estate planners include those of more advanced years and a discounted gift trust is thought to be appropriate, it will be necessary to take account of the recent High Court decision in the Bower case.

This tested the view of HMRC that where a person, who is 90 or over, effects a discounted gift trust, there should be no discount. This view is based on the grounds that the hypothetical purchaser in the open market would only purchase such an interest if he could insure the settlor´s life, and such insurance would not be available on a life aged 90 or over. As a result, any discount would be nil or nominal only.

Revenue and Customs Brief 21/09, issued on 2 April 2009, confirms this decision is now final because there will be no further appeal.

The result is that for those aged 90 or over (actual or rated age) or those who are uninsurable any discount will be nil or nominal. In the brief, this point is expressed as: “This means that only a nominal value is to be attributed to the retained rights and the value transferred by the gift (that is, the amount given by the settlor less the nominal value of the retained rights) will extend to a sum adjacent to the amount invested in the scheme”. In this context “adjacent” means “near to”.

In practice, HMRC expects insurers to issue “nil-value” certificates in affected cases, a practice which some companies already adopt.

The brief reiterates the point that there is no statutory right to deduct, on the death of the settlor, withdrawals taken from the policy from the amount invested, although it is understood that such deductions have been allowed in some cases by HMRC on a concessionary basis.

Finally, the brief explains that cases that have been on hold pending the outcome of the Bower case will now be examined and that for new cases the practice set down in the Inheritance Tax Technical Note, issued in May 2007, is to be applied.

In closing, in any IHT planning with the elderly, if the assets to be given or realised for cash to be given contain unrealised capital gains (even if at a lower level than they may have been not long ago and even if the gains can be deferred through a lifetime gift to a discretionary trust), it will be essential to take into account that, if held until death, under the current law the gains would, in effect, be wiped out through the automatic revaluation that takes place on death.

Planning using these assets could thus deliver a potential IHT saving (on survival of the gift by seven years) but at a CGT cost, through the lost revaluation.


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Natixis Global Asset Management’s quarterly Portfolio Barometer offers insights into UK financial advisers’ model portfolios and the allocation decisions they are making. Natixis’s Portfolio Research & Consulting Group works with financial advisers and other intermediaries to analyse and enhance their model portfolios and help them develop investor portfolios suited to today’s complex markets. The Portfolio […]


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