View more on these topics

The jewel of the nil

Nil-rate band planning for inheritance tax can be a very effective strategy.

Over the last year, since the 2006 Budget, much of the inheritance tax talk has been, understandably, about capital investment (largely, single-premium bonds) based IHT planning in the form of loan trusts and discounted gift trusts. Of course, the major points for debate have centred on the extension of the IHT discretionary trust regime to all trusts other than bare trusts and trusts for the disabled.

It is only very recently that we have had clarity on the HMRC view as to whether a bare trust for a minor beneficiary can be other than a settlement for IHT purposes.

Thankfully (although many feel that it should never have been in doubt), HMRC has stated that a bare trust for a minor can be a bare trust and thus outside the IHT discretionary trust regime.

Both loan plans and discounted gift trusts require the investor to accept a constraint on their access to their invested capital.

This is hardly surprising, given the main reason for the investor doing other than merely holding the investment for his or her own benefit is to mitigate inheritance tax. Loan trust investors make no gift but retain access to the original capital but not any growth. Discounted gift trust investors have no flexible access to capital, only a flow of regular payments. However, the investor does make an initial (discounted) gift which a loan trust investor does not.

Estate planners who are married or in a registered civil partnership and who have capital to invest have, however, always had another choice when it comes to estate planning, especially when they need to retain access to all capital and income from the investment during lifetime.

The choice to which I refer is, of course, to carry out no lifetime planning but confine IHT planning to the use of the nil-rate band on the first death. Where the couple want such a firstdeath gift to other than a surviving spouse to be other than outright and for the survivor to have continuing access to the funds settled via the trustees, a nil-rate band discretionary trust in each of their wills will achieve these objectives. Such a trust will come into effect on the death of the first of the couple to die and means that:

– the deceased can use his/her nil-rate band which will save inheritance tax because the assets are then not part of the taxable estate of the survivor and

– through the exercise of the trustees’ discretion the deceased’s widow/widower/ civil partner will have potential access to the assets in the discretionary will trust by virtue of him/her being a beneficiary under the trust. The surviving spouse could even be one of the trustees.

This type of planning has been used successfully in the past by many couples and, where investments are held in the trust, the IHT benefits can be enhanced by paying any amounts out of the trust to the surviving spouse in the form of interest-free (or interest-bearing) loans repayable on demand.

If the assets subject to trust are stocks and shares or collectives the trustees could raise cash to make the loan, without any tax liability at that time, by using their annual CGT exemption to release capital or by using the 5 per cent tax-deferred withdrawal facility if the trust asset is a singlepremium bond.

It is also worth remembering that, on the testator’s death, any accrued capital gains in the assets left subject to the will trust will have effectively been wiped out through the rebasing of capital value that takes place on death – regardless of the destination of the assets. This rebasing does not take place in respect of gains in a continuing (typically, multi-life last survivor) investment bond.

With the necessary powers vested in them by the trust, the trustees could make an interest-free loan repayable on demand to the surviving spouse.

Provided that he or she spends the money and does not bring into existence assets of an equivalent value, his/her taxable estate will not increase and, on the survivor’s death, the loan (assuming it is still outstanding) would be repayable to the trust which would mean that the deceased’s estate would be reduced and so the resulting IHT liability would also reduce.

The reduction in the surviving spouse’s taxable estate is subject to a caveat. Section 103(1) Finance Act 1986 provides that:”(1) Subject to subsection (2) below, if, in determining the value of a person’s estate immediately before his death, account would be taken, apart from this subsection, of a liability consisting of a debt incurred by him or an incumbrance created by a disposition made by him, that liability shall be subject to abatement to an extent proportionate to the value of any of the consideration given for the debt or incumbrance which consisted of:

(a) property derived from the deceased; or …..”

Section 103(3) gives a very wide definition of “property derived from the deceased”.

Basically this means that if property is transferred by a person (“A”) to the deceased (“B”) whilst alive and, at a later date, this property (or property derived from it) is lent back to A, that loan is not deductible for IHT purposes on A’s death.

This section was the subject of the recent Special Commissioner’s decision in the Phizackerley case. This case reminds us that it is sometimes worth going back to first principles when considering the viability of and any risks associated with tax planning arrangements.

This is especially so when the planning strategy has become well used and in some cases even “commoditised”.

I will look at the Phizackerley case in detail in next week’s article.


Grave concerns

A couple are advised to take maximum pension income rather than risk leaving it to the Chancellor in tax charges.

Fortune favours Mom structure

Hedge fund multi-manager Fortune Asset Management expects its closed-ended market wizards fund to list on the London Stock Exchange within four weeks.

5% Slump in young people taking out life insurance

The number of young people buying life cover has fallen by 5 per cent in the past year, according to Lifesearch.The protection company released its new business figures,which showed that people aged 35 years and under buying some form of life cover had fallen by 5 per cent to 31 per cent in the 12 […]

Tilney sells off funds in private client move

New Star has bought three fundsthe 34m European growth, 40m UK equity and 115m UK fixed-interest portfolios – with BlackRock taking Tilney’s 10m US growth fund.European growth fund manager Nicholas Sheridan will follow his fund to New Star and it will be rebadged, keeping its existing track record, as a European large-cap fund.The blue-chip portfolio […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm