Making a gift of property, into a lifetime trust or via a will, has become a common way for many married couples to reduce their potential inheritance tax liability. But changes to the regulations surrounding estate planning now means many of the established forms may no longer work but there are other simpler ways to plan.Rising property prices have meant more people are likely to be liable for IHT. In fact, last year there were 2.4 million homes which exceeded the nil-rate band. From December 5, when the Civil Partnership Act comes into force, more property owners will be able to take advantage of planning for IHT liability for the first time. The Act allows single sex couples to have the same rights and exemptions as married couples. This includes IHT. As the market for property planning is getting bigger, it is important to be familiar with the current planning methods and the issues affecting them. It used to be a simple process to remove property from the estate but as the Government clamps down on traditional planning, it is not that easy any more. With the help of a solicitor, some advisers would suggest the use of lifetime trusts to make a gift of a person’s share in a property. But the introd- uction of new regula-tions, such as the pre-owned asset tax, have made effect-ive lifetime planning with property much more difficult. Clients were able to gift away their property effect-ively for tax to a chosen beneficiary and still remain living in it. The Revenue changed this in 1986, with the introduction of the gift with reservation rule which meant if the client retained an interest in an asset, it would be treated wholly in their estate for IHT purposes. Of course, it did not take long before tax planners found ways round this, with such things like inter spousal trusts. The Revenue reacted to this by introducing Poat. This is charged on any gift that is not a GWR but where the settlor still has a beneficial interest. It applies to all gifts made since March 17, 1986 and is currently charged at an annual rate of 5 per cent of value. As can no doubt be seen already, either the GWR or Poat rules will usually catch any gift of the property where the donor retains occupation. To get the best out of this situation, the donor can pay a full market rent to the donee, live in joint occupation with the donee but have no benefit, or simply move out. Slightly harsh some might say – pay a tax (whether Poat or IHT), pay a rent or get out. There are plenty of advisers who are already aware of these issues, so have chosen to look at will planning instead. The first thing to do is to change the ownership of the property to tenants in common. This gives each person an absolute share of the property rather than jointly owning all the property. The wills are then amended to leave each person’s share to their chosen beneficiaries, in most cases their children. The beneficiary will receive the legacy on the death of the donor which then gives them outright ownership of that share in the property. This means the beneficiary could then move in, or even force a sale which could result in the widow(er) having to find somewhere new to live. This has often led to a condition being written into the will which states the property cannot be sold during the widow(er)’s lifetime, or that the beneficiary cannot take occupancy during this period. This though, is likely to create an interest in possession for the widow(er) in the donor’s share of the property. This in turn means the full value of the property is in the widow(er)’s estate for IHT purposes which negates the planning. Another idea is to leave the share of the property to a discretionary will trust but similar issues to those mentioned earlier still apply. A simple but wholly effective method already exists – whole of life planning. Whole of life plans have never been more suited as a viable tool for estate planning. The plan can be used to cover all or part of the client’s IHT liability, can be set up to pay out on the second death and should be written under trust so that the proceeds are out of the clients’ estates. The premiums are potentially exempt transfers unless they fall within the client’s annual gift exemptions, 6,000 when combined, or are treated as coming out of normal expenditure. To be considered as normal expenditure, the premiums must be paid regularly, not affect the client’s standard of living and be paid out of income. The Revenue is likely to disallow the normal expenditure relief if the client is taking 5 per cent withdrawals from an investment bond to cover premiums, as the 5 per cent’s are a return of capital and not considered as true income. It may also be an idea to ask the children to pay the premiums as, ultimately, they will be the ones to benefit when they receive their inheritance, with the tax paid. Most whole of life plans have a degree of flexibility to alter the level of cover, without the need for further underwriting. This could be invaluable when using the plan to cover an IHT liability, especially where property is concerned. If property prices soar, the client’s IHT liability is likely to follow suit. It gives peace of mind to know that if the client’s situation changes, so can the planning. It seems fair to assume that the Revenue will look at almost all IHT planning ideas. It is difficult to know what will work and what will fail but by effecting a whole of life plan, the client is taking the simplest and probably the safest approach in miti-gating their IHT problem. There were 4.5 times as many critical-illness sales as there were income protection in 2004, according to Swiss Re’s Term & Health Watch 2005. If the great and the good of the protection industry agree that IP is at least, if not more, important than other areas of protection, why do sales not represent this theory? Many have also wondered why IP is not sold as much as mortgage pay-ment protection insurance. While I cannot give any definitive answers to the above questions, I can at least put across an adviser’s theory. It will come as no surprise if I tell you that IP is certainly a more difficult proposition than life or CI but there is more to it than that. Most people consider protection for the first time when they take out a mortgage. The mortgage and protection advice is more than likely to be given initially by their local bank or building society or, if they are really lucky, by their local estate agent. It is prob-ably the branch adviser’s 15th appointment that week. He has an hour to go through the terms of business, initial disclosure and menu of fees documents, then complete the fact-find process and squeeze a quick sale towards his weekly target before the customer falls asleep. Is it going to be a life & CI policy tailored to the amount and term of the new mortgage or is it going to be an IP policy which will take an age to research and analyse against the client’s requirements, let alone explain? So why is researching IP such a protracted exercise? For starters, there is the Origo occupational definition database. It was based on an Exchange list built in conjunction with Munich Re back in the late Nineties and is now so out of date it covers lion trainer but does not cover any IT jobs. In my 17 years in this industry, I am sad to say I have never had the challenge of discussing the financial implications of a lion trainer losing their income. When the Origo list was last revised in 2004, all members were asked to suggest any new occupations and a grand total of nil were requested to be added. According to The Exchange marketing and services manager Ralph Tucker, the problem has been further compounded because although providers have developed their own individual databases, the industry standard – Origo’s – that all portals use has not changed and until providers pull together to update their standard, the disparity will persist. Therefore, that answers my question as to why the occupational definitions under which a claim is assessed for which an adviser thinks they are applying for their client can be different from the definition under which terms are offered. In order to be proficient in recommending IP, an adviser has to have a comprehensive under-standing of occupational claim definitions that include own occupation, any occupation, activities of daily living and work tasks. Not to mention house persons benefit and the implications of these definitions to a potential change in employment or career break. Furthermore, these definitions will apply to varying occupations according to each insurer. Many would argue that this proves you need to be a specialist to advise in this area and I would not disagree but with all these hurdles, is it any wonder that the stack ’em high sell ’em cheap distribution channels will opt for the far simpler sale of MPPI? I do not have a problem with this, provided that this product is not masquerading as IP and that consumers understand the clear distinction between these two very different products. Our experience is when asking a new client to explain their understanding of what their existing MPPI product will and will not do for them, they do not understand the differences and why would they if the product was sold without real advice and called itself income protection. The FSA is undertaking an investigation into the way in which such payment protection is sold. I did a Google search on income protection and found that two out of the three spon-sored sites were selling what was clearly MPPI and were actually calling it income protection. Although the sponsored sites constantly change, it would still appear the FSA has its work cut out if it wants to see purchasers of these products treated fairly. A recent Defaqto report highlighted 13 different ways that insurers calculate insurable salary. Of course, more people today have incomes from different sources so here is another complication when recom-mending IP. Take your average small business owner or even IFA who is likely to be remunerated via salary, dividends, renewal comm-ission and fees. Not all this will be taken into account when assessing insurable salary and, again, it depends on the insurer. Renewal income for an IFA or work in progress for the average self-employed person poses a particular problem when setting the deferred period for an IP policy because many insurers will reduce benefit accordingly. Fair enough but how many small businesses with work in progress can unequivocally quantify how much this income would be and for how long it would last? An educated guess is the best that can be achieved. I realise, of course, that I am not proposing any solu-tions to these issues. I am not a specialist in product designing, reinsurance or underwriting and would prefer to leave that to the experts.