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The heir apparent

What new inheritance tax proposals could mean for financial services

On August 17, the economic competitiveness policy group published a 211-page report looking at equipping the UK for globalisation. The wide-ranging paper looked at a whole host of issues from energy policy, transport, science, higher education and pensions to taxation.

Taking a narrow look at the policy recommendations for capital taxation (which includes inheritance tax), the paper referred back to the work done in 2006 by the Tax Reform Commission, chaired by Lord Forsyth.

That commission pointed to the extensive and ill-understood legislation in this area. Its report, published in October 2006, was entitled Tax Matters and contained four specific proposals relating to capital taxation.

Proposal 35 of that 2006 Report recommended the abolition of inheritance tax, to be replaced with a capital gains tax charge on death. Friday’s report from the ECPG adopted much the same approach with a nod back to the 2006 report.

It is not yet clear to what extent the Conservatives will adopt any of these policy proposals. Certainly, however, a debate has now begun over the future of capital taxation and it is interesting to project what this might mean for financial services.

For many years now, the financial services sector has been actively engaged in offering trust solutions that form part of people’s estate planning strategy.

What place would these trusts have in the new world as envisaged under the ECPG report?

The proposals, if implemented, would mean that IHT is abolished and replaced by capital gains tax. Assets held for more than 10 years before death would be exempt from charge. The primary residence would also be exempt from charge (as now with the principal private residence relief under current CGT rules).

Considering the impact of this on lifetime estate planning, it certainly would not necessarily mean the end of trusts or lifetime gifting. Indeed, it would become imperative to consider lifetime gifting earlier, since the current seven-year clock for IHT could effectively become a 10-year clock.

Just as now, assets might not be best handed over directly to younger family members so the use of trusts could continue to be prudent.

Accountants, lawyers, stockbrokers and financial advisers would all continue to engage clients in discussions about how best to plan for the future and these discussions would cover the transfer of wealth to the next generation under whatever rules prevailed at that time.

Just as now, lifetime gifts would be part of that landscape.

The exemption for the primary residence on death would be interesting.

Could it mean that people do not want to downsize and release funds so as to protect the more valuable family home from CGT on death? The tax tail should not wag the investment dog, but it could well have an impact on the decision-making for some families.

Plus ca change. Any proposals which bring simplicity to capital taxation might be welcomed, just as the proposed new rules for IHT100 forms are a welcome step towards simplicity.

A more integrated approach to capital taxation, effectively merging inheritance tax and capital gains tax, might well alleviate some of the current difficulties but people should not be under any misapprehension that one’s estate on death would suddenly and automatically become taxfree under these proposals.

Julie Hutchison is national development specialist – estate planning at Standard Life



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