Industry members suggest inheritance tax (IHT) rules on pensions are unlikely to be revealed until the Budget, leaving advisers with just two weeks to get all the details in place.
With less than five weeks to go until A-Day, many in the industry believe the IHT rules will be announced by the chancellor in his Budget on 22nd March, with chartered accountant and business adviser firm MacIntyre Hudson actually quoting odds on what will be included in the speech.
It believes the chances of Gordon Brown introducing a consultation on comprehensive changes to the IHT regime are reasonable odds at 15 to 1, while the introduction of more IHT anti-avoidance legislation seems much more likely with odds of 3 to 1.
Victor Dauppe, tax principal at MacIntyre Hudson, says the chancellor could easily befriend a lot of people by announcing a wholesale review in the structure of the IHT regime which, as a result of the property boom, affects more people than before.
But he adds: “However we should prepare for the possibility of yet more tinkering with the current regimes under his usual pretext of preventing abuse.”
But if Her Majesty’s Revenue and Customs (HMRC) and the Treasury do wait until Budget day, advisers will have just two weeks to prepare those clients who will be affected by the changes.
As a result of the delay in releasing the final proposals, Scottish Equitable is calling for a “period of grace” from the Revenue, should the plans go ahead, to give advisers more time to work with clients affected by the changes.
According to Scottish Equitable, under the plans outlined in a discussion paper last July, the death of a person while in an alternatively secured pension (ASP) will almost certainly lead to an IHT charge on the residual fund, while annuities are likely to escape the tax.
But the position is less clear for those already in drawdown or phased retirement, as the Revenue is proposing it should be the responsibility of the estate to prove the intention was not to pass on wealth to the beneficiaries.
The company says the delay in announcing the decision is unacceptable and is causing planning blight for advisers, their clients and providers.
Rachel Vahey, head of pensions development at Scottish Equitable, says: “We want these proposals scrapped, But if the revenue is not prepared to do that it must allow a period of grace to allow providers and advisers time to digest the new rules and allow the huge numbers of people already in drawdown time to plan accordingly.”
She adds with only a few weeks to go until A-Day, the Revenue has completely underestimated the time it will take to implement any new rules.
John Gleadall, senior technical manager at Legal & General, says it is an impossible situation for advisers who have to tell clients they don't know what is going to happen, as it is all still up in the air.
In particular, he points out there are a few anomalies in IHT planning - such as people leaving money from their pension to charity - which under the current proposals would not be exempt from IHT.
He says: “The current rules are provided on a sort of 'grace and favour' basis but come from the Inheritance Tax Act 1984, which wasn’t written with today’s pensions system in view, and the Capital tax Office have said they can no longer cope with this. As a result I don’t expect to see anything on the new rules this side of the Budget.”
John Lawson, head of pensions policy at Standard Life, agrees with Gleadall the IHT rules won’t be released anytime soon, particularly as the industry is still waiting for the investment regulations including prohibited investments, also announced in the pre-Budget report in December.
He says: “There is still an awful lot of stuff outstanding, so it’s not going to be a very clean handover, its going to be all piecemeal and staged. But there’s been an enormous response to the IHT consultation, so hopefully we will get a softening from them, as there is no need to be so harsh on those aged under 75.”
Lawson says the proposals which apply for those who carry out estate planning and die before the age of 75 would apply to around one in a 1,000, so he argues to introduce draconian rules to catch 1 person is "ridiculous", particularly as the chance of the Revenue losing money on this one person is negligible.
He suggests instead the Revenue should leave the rules alone for those below the age of 75, and just apply the current anti-avoidance rules to those aged over 75.
“It seems quite obvious what they’re going to do, so I don’t know what the problem is, as one of the biggest possible ways of IHT avoidance was removed when residential property was effectively prohibited in self-invested personal sensions (sipps),” says Lawson.
He adds there is very little for an adviser to do at the moment, as the Revenue could quite legitimately argue they should not be planning for events which are not yet in existence, and should be referring to the current IHT regime in place, as things like alternatively secured income will not come into effect until A-Day.
But if advisers do want to try and do something in preparation for the rules, Vahey suggests the category of people they have to be aware of are those phasing in retirement, as they are the ones they may have to do work for.
She adds: “It is a very difficult position for advisers, and all they can really do at the moment is know which clients fall into this particular category, then once they know the rules they can act straight away.”
Alternatively, she suggests advisers could make progress on the worst case scenario for clients based on the rules proposed in the consultation, by starting to prepare a defence case for why the client is choosing to go into ASP, or phasing in their retirement.
Vahey says: “One of the areas we were very much concerned with is how this was going to turn out. For any client thinking about taking out ASP, the adviser is probably best approaching it on the basis that IHT will apply if the client dies in ASP. But the people most affected by this will be those under 75 either taking some part of their pension now, or deferring it until a later time.”
Patrick O'Brien, spokesman for HMRC, confirmed the rules are still "under consideration and no date has been set yet."
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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