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IHT realities

As I enter my 26th year of working within financial services, I have been reading the column inches (more like miles) of coverage about the changes to trust law and the inheritance tax realignment.<

p/>I must admit that although I enjoy trying to understand the rigours of the many changes to trusts, after trying to explain the implications to other people, I began to despair that there is very little chance of the average client of a financial adviser understanding how the implications will apply to their situation. Even if they do understand the detail, they will be disappointed with the less advantageous financial position they and their beneficiaries will be in.

On a more basic level, I have spent many years advising members of the general public on their finances and how sacrificing the purchase of an obscene amount of new shoes or enjoyable nights out can result in financial rewards and independence in the future.

The case I presented to young clients was always simple -“Remember, in order to save for your dreams, don’t spend all of your income and plan what you want to do with the spare cash.”

Basic sales training for advisers includes explaining to clients the truism that only two things in life are certain – death and taxes – but most of my younger clients seem to believe they are immortal and that tax is something taken from their earnings. But they believe rules dictating additional amounts of tax is taken from those who earn or inherit a lot of money will not apply to them.

To back up my experience, Fidelity International reports that for those aged under 35, 49 per cent believe an inheritance rather than their personal savings would provide financial security. The reality is that of today’s retirees, fewer than half received an inheritance and two-thirds of estates inherited were valued at less than 20,000.

The recent plethora of research into inheritance tax provided by companies such as Bradford & Bingley, Vantis, Friends Provident, Grant Thornton and the Halifax comes as no surprise. In the mountain of IHT research, Friends says only one person in four is aware that IHT is charged at 40 per cent. The research shows the desire to hand wealth down is still a strong driver for many, with three-quarters hoping to leave an inheritance to their children or family.

On the back of this emotive wish, we see the financial product development experts launch a product that has been available in Japan and Switzerland for years – the inter-generational mortgage. These products enable the property and the mortgage to be passed to children or other beneficiaries, either on death or possibly beforehand.

These mortgages may help mitigate inheritance tax although we will have to see how far reaching the IHT savings will be. Inter-generational mortgages may also help first-time buyers to get on the property ladder. The situation is dire in London, where according to the CML, lending ratios are at an all-time high for FTBs, in some cases at six times salary.

It has been calculated that the transfer of housing wealth in the coming 15 years will be the biggest of its kind ever recorded in the UK, with baby boomers playing an important part in this intergenerational transfer of housing wealth. As an aside, we are in the middle of another baby boom, resulting in the highest UK population of over 60 million ever seen. Because of this increase, I believe we will continue to see a recurring pattern of huge amounts of housing wealth being inherited by the beneficiaries of the 70 per cent of the UK public that are homeowners. This commentary page is not the place to discuss how rapidly rising house prices will widen the gulf between the 30 per cent of the population who are not able to be homeowners and those that can.

The political sound bites covering either a total reform of the system or reducing the number of estates affected is interesting and is being written about by political commentators. But in my simple mind, I know the Treasury’s coffers are being swollen by 3.6bn just from IHT receipts alone. Even if IHT is supposed to be a rich man’s tax seeping greedily into estates of the hard working classes, it is unlikely to be pushed back to be only a rich man’s tax.

With house prices having doubled in the last four years, we have a moral duty to ensure the UK public understands that it could be simply the value of their property or properties that pushes them over the IHT threshold, ensuring their estate loses a whopping 40 per cent of the value they wanted their loved ones to inherit.

Kim North is director of Technology & Technical

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