The March Budget did not bring the bombshells of 2006, but it has still been a busy year for developments in the area of estate planning.
HMRC initiatives and court decisions have been plentiful, with mixed results for taxpayers. With 2007 now almost at its halfway point, it is a good moment to stop and review where we are with estate planning and ways to minimise inheritance tax for clients.
One of the first HMRC announcements of note was just after the Budget when it confirmed that a gift to a bare trust for a minor would be treated as a potentially exempt transfer.
This was a great piece of news as it confirmed the position that most practitioners thought had always prevailed.
Advisers looking at the options for clients to make gifts will have the choice of using absolute/bare trusts with confidence now, whereas many had avoided doing so in the first few months of the year while HMRC was taking legal advice on this point.
This means that a Pet is still perfectly possible in the context of using a trust.
The health warning remains, however, that, with a bare trust, the named beneficiaries have value added to their estates for inheritance tax purposes, which might not always be the best result (or might at least require a protection policy to cover the potential IHT due to that beneficiary’s death).
The widely reported Phizackerley case then made national news, although arguably much of the coverage did little to shed light on some of the issues.
There are just a couple of key points to take away from this case. First, it certainly does not signal the end of nil-rate band will trusts, which remain effective in the right circumstances.
Second, for any trustees considering making a loan to a beneficiary of a trust, check back to ensure the loan assets in no way emanate from the beneficiary about to receive them.
If the assets can in some way be traced back as originally belonging to the beneficiary, do not make a loan and instead consider an outright advance. That avoids the pitfall in Phizackerley where a loan is not deductible if comprised of assets originally derived from the person who later receives them back as a loan.
This point is of wide application and comes up not just in will trusts but also life office single-settlor trusts, for example, gift plan or discounted gift plan where a spouse could be a potential beneficiary.
In May, the HMRC technical note on discounted gift trusts was published and is now in full effect.
Discounts across the industry have been revised, with a general trend downward in line with the technical standards for calculating the discounts preferred by HMRC.
This development was welcomed as a good example of HMRC liaising and consulting with the Association of British Insurers in the weeks before the publication of the note, which meant that chaos was avoided in its implementation. For those working with professional connections, the HMRC technical note is a good source to refer to in terms of evidence of HMRC’s approach to the IHT treatment of discounted gift trusts.
The IHT100 form reporting limits have still not been increased despite certain figures being trailed earlier this year.
Advisers should therefore have in mind the £10,000 reporting limit which is still in force for the time being.
It is hoped that this will change in the months ahead to remove this unnecessary compliance for gifts which do not produce tax revenue for the Treasury.
What remains for advisers? The options on the table in connection with investment bond trusts remain the familiar life office trusts of loan plan, gift plan and discounted gift plan.
What is new is the approach being taken to gifting levels, as many clients do not want to incur the initial 20 per cent IHT charge and therefore only gift up to their nil-rate band to avoid the charge when using flexible/discretionary trusts.
Perhaps it is time to look at some of the exemptions more closely than before. Have your clients made full use of their annual exempt amount of £3,000 – or £6,000 if last year’s was not used?
With regular gifting over many years, those amounts can add up to reduce the estate of a husband and wife.
The other key exemption to make sure you discuss with clients is normal expenditure from income.
This is a great exemption which could be more widely used. Financial advisers are often in pole position to discuss this with clients given their role in advising on retirement income options.
One simple idea is to make regular gifts out of retirement income. Critical to the success of this IHT exemption is the paperwork which records the income and expenditure position of the client.
For this, why not use the HMRC form D3A? This is the form, available on the HMRC website, which the executors of a deceased person use to claim the exemption on death for lifetime gifts from income.
The format of the D3A is rather like a table recording income, then expenditure, leaving a net figure of surplus income from which gifts could be made.
Having good records is key to proving this exemption when the time comes. As the Macdowall case showed a few years ago, those with healthy pension incomes can indeed make significant gifts which are exempt, provided they are regular and do not undermine the standard of living of the donor.
The gifts made could either be outright, or to a trust, for example a gift plan.
Finally, it remains the case that clients should have up-to-date wills and powers of attorney. For those in England and Wales, it might be worth looking into an enduring power of attorney before the rules change in October and lasting powers of attorney come into force. New registration forms and fees will apply at the outset so investigate now while you still can.