Estate planning is an obvious area of financial planning where solutions rather than mere products are needed. Consequently, it seems obvious that estate planning is and will continue to be an advised as opposed to a disintermediated activity.
It is also an area of business that lends itself to collaboration between an individual's professional advisers, that is, IFA, accountant and solicitor, so that the most “joined-up” and comprehensive solution is delivered.
Estate planning should, in my opinion, also form an essential part of the wealth management offering from those seeking to position themselves in this market.
There was significant speculation among financial advisers and product providers int- erested in this market ahead of the Chancellor's pre-Budget Report over the possibility of inheritance tax change but the Chancellor was silent on this subject. Many were not disappointed.
This is not to say, however, that changes will not occur in the next or any future Budget. Most would agree that it is entirely likely that if changes are to take place (then at least to the extent that they have a negative impact on planning), these may not be signalled in advance.
History has shown that anti-avoidance measures tend to be introduced without advance warning so as to maximise the “surprise” element and minimise (what the Inland Revenue sees as) unseemly “last-minute” or “sell by” activity before a signalled closedown.
Consequently, the period between now and the Budget may well be a good time to discuss IHT planning possibilities with those clients for whom inheritance tax planning is appropriate.
The fact is that considerable changes are still possible and so, where appropriate, planning should, if possible, take place before the next Budget to make maximum use of the current favourable regime.
Taxpayers should not, of course, be pressed into hastily conceived or ill-conceived strategies just because there is the chance of change.
The point here is that if planning is appropriate, delay could be costly. Do not forget that some six years ago the Labour Party publicly criticised the inheritance tax regime and, aside from increases in the nilrate band, very little has changed since then.
In very brief terms, the main advantages of the current inheritance tax regime are as follows:
A nil-rate band of £242,000 with a flat rate of tax on death (40 per cent)over that amount.
The potentially exempt transfer rules.
A 100 per cent maximum level of business property relief and agricultural property relief.
Planning using deeds of variation.
Lump sum inheritance tax schemes that avoid the gift with reservation of benefit rules Advantageous rules for excluded property trusts.
All of these are areas that may well be targeted for harsher treatment under Labour in the future.
Bearing in mind the possibility of a change to the IHT regime and subject to the taxpayer retaining sufficient access to and control over capital being used in planning, individuals who have potential inheritance tax liabilities should seriously consider using their nil-rate band sooner rather than later (see potentially exempt transfers below).
If they are married, they should seriously consider arranging their asset ownership so that both spouses can utilise their nil-rate band either during lifetime, or on death via their will.
Remember though, so-called “equalisation of estates” is only a means to an end, not an end in itself.
If the nil-rate band of the first of a married couple to die can be fully utilised by, say, legacies to children, an IHT saving of up to £96,800 on the second death can be achieved.
If there is concern over continuing access to capital for the surviving spouse a suitable will trust could be used.
Remember, it is not essential to have this “underpinned” by a financial product, although of course it can be.
The trust should incorporate a wide power of appointment to include the surviving spouse as a potential beneficiary. Appropriate powers to lend to beneficiaries should also be included in the trust.
There is sometimes debate over whether the will trust incorporating the power to appoint should be in discretionary or interest in possession (with power to appoint) format. Both will give the flexibility required.
The key points of difference are taxation points. For inheritance tax, the choice made will need to take into account the possibility of 10-year anniversary and exit charges, relevant if the value of the trust property exceeds the nil-rate band.
For interest-in-possession trusts, the IHT issue will revolve around the likely frequency of changing beneficiaries as each change could trigger a Pet.
All capital gains will be charged at 34 per cent after taper relief and the annual exemption in either type of trust. Subject to anti-avoidance provisions, income will be assessed on the person(s) entitled to it under the interest in possession trust.
If the only underlying investment is an insurance product then capital gains tax and the ordinary income tax rules will, of course, not be relevant.
The choice, as they say, is yours.