No matter how much IHT planning we recommend clients do, it is more than likely some tax will be payable when the second of a couple dies. This may be because they ignored your advice or because they were reluctant to give away sufficiently to eliminate their liability.
You must make sure you talk to your clients about all the possible ways to reduce their liability. Keep a record of what you have talked about and why a particular course of action has been taken.
Finally, don't forget to keep reviewing your clients' affairs. So many things can change over the years, even if legislation remains the same.
Here is a checklist you can use to ensure you have covered all the essential areas when giving IHT advice.
Review wills regularly.
Consider creating a “dying tidily log” for each client. Make sure information is included on what exemptions are being claimed for lifetime gifts. If the normal expenditure out of income exemption is to be claimed, ensure evidence is included so the personal representatives can substantiate this claim.
Are any of your married clients non-UK domiciled? Remember, there is no full spouse-to-spouse exemption where the recipient is non-UK domiciled. The exemption is limited to £55,000.
Make sure UK assets of non-UK-domiciled clients are within the nil-rate band.
Make sure non-UK assets are held in trust if there is a problem with probate or forced inheritance in that country.
Consider ignoring the availability of business or agricultural property relief when put-ting in place whole-of-life cover if the long-term aim is to sell the qualifying asset or it is likely the surviving spouse would sell it. Putting life cover in place when the couple are young and healthy may be a lot better value than delaying it. If the relief is eventually claimed, it simply means the family will have more money than they need to pay the IHT.
Be aware that cash- or investment-rich businesses may not totally qualify for business property relief.
Remember that IHT taper relief applies to reduce the tax payable, not the value of the gift. If the gift is less than the nil-rate band, in general, no taper relief will apply. The correct way to cover any potential liability is generally a seven-year level term insurance with the sum assured equal to 40 per cent of the sum gifted. Consider whether it should it be on a single- or joint-life, last-death basis.
Make sure any insurance policy aiming to pay IHT is in trust for the person(s) liable to pay the bill. This will generally necessitate a flexible or discretionary trust.
Be careful with gifts with reservation. Ensure clients do not take any action without discussing the implications with you and/or their solicitor.
Lifetime gifts of the main residence will be ignored for IHT purposes if the donor retains the right to live there unless a market rent is being charged.
Be careful that lifetime gifts do not trigger a CGT charge. The worst scenario is that an individual gifts shares to a trust, triggering a CGT charge on disposal of the shares, and then dies within seven years of the gift, so triggering an IHT charge as well. If the client had waited, the CGT liability would have disappeared on death.
If you want to gift shares, gift the ones with the least gain. A good time to gift shares for IHT purposes is when there is a dip in the market, when a gift of some shares or unit trust holdings could actually trigger an allowable loss which could be set against other gains.
Consider revert-to-settlor trusts for endowments where the client is absolutely certain they will not need access until the reversion date.
Consider setting up a lifetime will trust or family trust which aims to use the married couple's nil-rate band on first death without them changing their wills. These trusts can include the settlor as a beneficiary, which is obviously a reservation of benefit but should not trigger an IHT charge on first death as the deemed legacy to the default beneficiaries will be restricted to the available nil-rate band.
Make sure married couples use the nil-rate band on first death in some form or other, either with a well-drafted will incorporating a trust or a lifetime will trust. These trusts can include the surviving spouse as a possible beneficiary. Make sure the trustees have wide powers of investment and have the power to distribute capital as well as income to beneficiaries. Also ensure the trustees have the power to make loans to beneficiaries.
Consider nominating the trustees of the above lifetime trust as the recipients of any death benefits under a pension scheme. Where the spouse is a possible beneficiary of the trust and the trustees have the power to lend money to a beneficiary, there is even more scope for planning. Any loan to the spouse creates a debt against his or her estate on second death. In creating a gift-with-reservation trust which seems to do nothing for IHT planning, you have actually made your clients use at least part of the nil-rate band on first death and saved potential IHT on any death-in-service benefit on second death if it had been paid to the spouse. You have also created the potential for debts against the estate by the trustees making loans to the widow or widower.
Consider recommending an IHT lump-sum plan to your client, gearing the one you choose to their needs.
Ensure clients are happy to give away the funds. Do they need access to the funds in the plan? Do they need flexibility on how much they can take and when from the plan? Would they be happy with entitlement to a fixed amount for life?
Your clients must be happy with their own security before they make lifetime gifts or legacies on first death. Maximise retirement provision so they are comfortable in their old age, no matter what happens. Look at the position where one of a retired couple dies. Has the survivor sufficient income?
Consider long-term care provision. Remember that if an elderly client goes into a home, he or she will have to fund this substantially under current legislation. Effectively, this is a 100 per cent tax – never mind 40 per cent IHT. A long-term care plan can ensure this eventuality is provided for to some degree.
Deeds of variation are useful to redirect assets on death. Remember, however, that for income tax purposes, the settlor of any trust created is the original beneficiary. This facility may not always be with us. Deeds of variation are no substitute for a well-drafted will.
Review the value of unit-linked and stockmarket assets after death. Would a claim for revaluation be beneficial?
Remember, a whole-life policy under a flexible trust is the most uncontroversial method of IHT planning. The clients can keep their security and use the income from retained assets to pay the premiums. But if it pains a client to pay IHT at all, there is plenty to consider on how to avoid it. Make sure you are the one to discuss it with the client.