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Inheritance tax planning

When Labour came to power in 1997, inheritance tax was flagged for considerable reform. So, perhaps one of the biggest tax surprises is the lack of significant change to the IHT rules.

Bearing this in mind, the following points should be taken into consideration by anyone who is concerned with a potential IHT liability.

One of the simplest methods of IHT planning is to make full use of this year&#39s annual exemption (£3,000) and any unused exemption from the previous year. It is important to remember that it is necessary to use the current year&#39s exemption before using any of the previous year&#39s available exemption. The exemption is available to both a husband and wife and, apart from the ability to carry it forward for one year, will be lost if not used.

The normal expenditure out of income exemption can also be useful. This relief cannot be carried forward. To use this exemption, gifts must be:

– Regular.

– Made out of income.

– Of such a size as to not affect the donor&#39s normal standard of living.

An appropriate life insurance policy held in trust may be a way of using this exemption and/or the annual exemption.

Where an individual is reluctant to undertake IHT planning by making gifts of investment assets because of the potential capital gains tax liability that may then arise, consideration could be given to using a discretionary trust.

Currently, full capital gains tax holdover relief applies. However, the Government may wish to cut back the relief so it is only available to the extent that IHT is paid on the gift to a discretionary trust.

Action in such cases may therefore be advisable ahead of the year-end and the Budget. Of course, such planning is not suitable for everyone, for example, older persons in ill-health where gains would otherwise be washed out on death.

If there is a potential IHT liability on the death of a taxpayer or on the death of his or her spouse and the taxpayer has been considering making sizeable gifts, he or she should give serious consideration to this before the Budget.

It is always possible (but not more than that) that the potentially exempt transfer regime may be removed or made harsher so investors who are troubled by IHT should be considering lifetime gifts now. If control and flexibility over the assets to be gifted is required, a gift to a trust can be useful. However, the capital gains tax implications of making the gift must be taken into account carefully.

If cash is gifted for investment, attractive investments for the trust are investment bonds, as non-income and non-capital gains producing assets in the hands of the investor. There may also be an understandable reluctance to make a gift where the property qualifies for 100 per cent business or agricultural property relief.

Where it is not possible to make an outright gift because of the need for continued income, the use of an insurance-based trust arrangement may provide the taxpayer with IHT planning combined with future access to regular capital payments which can be used to supplement income.

However, the attractions of such schemes may well be cut back by any forthcoming IHT changes so any action should be considered before the Budget. There are a number of plans available, each appropriate in different circumstances.

Premium payments under a life insurance policy (normally on a joint lives, last survivor basis for a married couple) under trust are an effective way of :

– Providing cash on death that is free of IHT.

– Using the annual and normal expenditure exemptions.

Using a flexible trust, benefits secured under plans implemented can be adapted to changing family circumstances.


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