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Inheritance tax – good news all the way

Once again, another Budget passes with no significant changes to the inheritance tax regime, the nil-rate band simply rising in line with inflation to £255,000.

On the surface, IHT seems to be the forgotten tax as far as Gordon Brown is concerned but perhaps if we dig a little deeper we can detect a reason for this. Since Labour came to power in May 1997, the level of the nil-rate band has increased by 18.6 per cent whereas average house prices have increased by 84 per cent, rising to 115 per cent for property in the London area.

Thus, without the Chancellor having to do anything to significantly tighten the tax, more and more people are being dragged into the IHT net.

In particular, and of interest to married couples, no action was taken to stop planning using a “spousal interest trust” which was used so successfully in the case of CIR •Eversden to circumvent the gifts with reservation rules.

A definite opportunity therefore remains to look at planning using this type of arrangement although advisers should be aware that the Inland Revenue has appealed against the decision in Eversden and a verdict is expected from the Court of Appeal towards the end of May. If the Revenue loses on appeal, there may still be time to insert amending legislation into the Finance Bill as it passes through its various committee stages.

Even if the Eversden “loophole” is closed, which, at some stage, it surely will be, there are still a wide variety of lumpsum planning arrangements available in the market to suit each particular client&#39s circumstances and IHT planning of this nature will remain an important area for advisers and their clients.

However, just two weeks before the Budget, there was a very important announcement from the Revenue on IHT that may have escaped your notice. One of the problems with IHT has always been that it involves a catch-22 situation for a deceased&#39s personal representatives. On the one hand, they cannot obtain a grant of probate until the IHT has been paid but, on the other hand, until such a grant has been obtained, they cannot access the deceased&#39s funds to actually pay the tax.

The traditional answer to this problem has been either to pay the tax in instalments but this option is only available in respect of certain types of property or else for the personal representatives to take a loan to pay the tax due but this could be expensive and may be time-consuming to arrange.

Of course, if the personal representatives just happen to be the beneficiaries under a life policy written in trust on the life of the deceased, this will provide them with the funds to pay the tax. However, another solution is now available.

From March 31, a new streamlined approach to paying IHT (and obtaining the grant of probate) has been in operation, whereby personal representatives can draw on money held in the deceased&#39s account to pay by electronic transfer the IHT due on delivery of the IHT account (form 200).

One slight drawback is that participation in the scheme by the financial institutions is voluntary although it is expected that most of the big banks and building societies will be involved. Personal representatives should, however, check with the institution they are proposing to use that they are part of the scheme (and whether or not they intend to make a charge for the service).

Personal representatives wishing to take part in the scheme should first obtain a reference number from the Capital Taxes Office at least two weeks before the IHT 200 is submitted.

Once the tax has been calculated, the IHT 200 should be sent to the CTO in the normal way but at the same time an application for direct transfer of the funds (form D20) should be signed by the personal representatives and sent to the bank or building society which in turn will transfer the funds and pay the tax electronically.

Personal representatives should be aware that the scheme will apply to accounts in the deceased&#39s sole name only and that a separate form D20 must be completed for each bank or society from which they wish to transfer funds to pay the tax.

This will help to ease a long-running problem but planning for IHT mitigation by the use of life insurance policies should still be very much part of the advice giving process when talking to clients in the future.


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