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Threshold of change

It seems like tax is back on the political agenda, with the Government and the Conservatives spending much of last week trying to score points off each over their respective public spending plans.

Each side accused the other of having to cut public spending to make ends meet but while neither is willing to admit to cutting public spending, the Conservatives are more than happy to put forward tax cuts, with inheritance tax again being singled out by them as a target.

At last week’s Association of British Insurers’ biennial conference on saving, Tory Shadow Chancellor George Osborne said that short-term changes in the tax regime were damaging public confidence in saving and financial planning. To prevent this, he said the Conservatives would simplify the tax regime and would set up a Government- funded panel of tax experts.

As part of the simplification, he restated the party’s commitment to increase the IHT threshold to £1m.

Osborne said: “Reducing uncertainty is one important step towards rebuilding our savings culture. We also proposed at the Budget the abolition of basic-rate tax on savings income. We are committed to raising the inheritance tax threshold to £1m so that only millionaires pay tax on what they have saved to pass on to their children.”

When this is combined with the Conservatives’ commitment to scrapping forced annuitisation at age 75, future IHT rules could look very different than they do now.

Although the Conservatives have not yet come up with proposals for what the tax position should be for anyone wanting to bequeath assets from drawdown after 75, the signs are that they are moving away from the 82 per cent tax charge that currently exists.

Speaking at the Money Marketing Retirement Planning Summit last month, Conservative Shadow pensions minister Nigel Waterson said the current rate is punitive and is there for political reasons rather than as part of carefully thought out policy.

Among the suggestions raised by delegates was one to introduce a flat rate of tax of 40 per cent for any remaining funds on death, a figure which would bring funds in alternatively secured pension into line with the rate on IHT on all other assets.

Waterson said: “We still have not finalised the tax aspects. The suggestion from the floor was that you just pay the 40 per cent rate but the 80 per cent rate is just punitive”

But without a set date for a general election, any changes to the rules are just speculation for now.

The current rules meanwhile continue to catch many people out. Despite last year’s changes to the IHT regime which saw the individual threshold for IHT increased to £325,000 per person and the ability for any unclaimed nil-rate band from the first partner being applied to the estate on the second death – which could mean a cumulative total of £650,000 IHT-free – many people continue to pay the tax unnecessarily.

According to Unbiased. co.uk, almost £2.2bn will be paid needlessly this year, a rise of 16 per cent on last year’s total.

Unbiased.co.uk chief executive David Elms says: “Extraordinary sums are being lost from estates because the deceased has not made adequate provision for inheritance tax.”

Despite falling house prices, many family homes remain above the £325,000 threshold, which automatically puts any other assets at risk of a 40 per cent tax bill on death. But Unbiased says the biggest cause of unnecessary IHT bills is the failure to write life insurance policies in trust.

It says 81 per cent of people take no action to limit their exposure to IHT and one of the main reasons for this is put down to ignorance. Recent figures from Aviva suggest that a fifth of people liable for IHT have no idea that they will have to pay the tax as many people consider it is a tax only for the super-rich. Even for those who know they will face a bill, Aviva suggests that only 16 per cent know where the threshold for IHT starts.

Aviva senior marketing manager Nicholas Burton says: “IHT is not just for the super- rich. Many of our customers are mystified by the current system and, as a result, are not taking action or leaving things too late. Even with current fluctuations in the housing market, people still need to be aware that property can easily push them over the threshold.”

In fact, it seems that the system is so confusing that many people do not know about even the simplest measures for reducing their IHT liabilities, such as annual gift limits or IHT-free charitable donations.

Incorrect assumptions could be equally costly. Aviva says 60 per cent of people do not know pension assets can be liable for IHT and 51 per cent do not realise that life insurance is also liable if written outside a trust. Seven per cent of people believe their estate will not have to pay IHT if they leave all their assets to their grandchildren instead of their children.

Burton says: “Estate planning is traditionally one of the most complicated areas of financial planning, with many consumers being alienated by the jargon and technical information available to them.”

To help with this, the company recently released updated information for consumers and IFAs to help with public understanding.

Until the rules are changed and simplified and IHT genuinely becomes an issue only for the super-rich, there is plenty for IFAs to continue to advise their clients on.

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Settlor’s rights

Loan trusts are an excellent tool for lump sum inheritance tax planning for clients who need ongoing access to their initial investment.

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