Increases in the number of people affected by inheritance tax means people should not wait until they are retired to start estate planning.
Research from the WAY Group, an investment adviser firm, show families typically begin estate planning around the age of 70, with men starting slightly earlier at the age of 69 while women tend to wait until they reach 72.
Although men and women can both expect to live for at least another 13 years after they start planning for IHT, the Way Group says the changes in the March Budget to trusts means there is a “compelling need to start planning much earlier”, especially as the number of people caught by IHT is set to increase.
The latest figures from HM Revenue and Customs (HMRC) reveal over the last three years IHT receipts have increased by 42%, with the total amount forecast for 2006-07 expected to be £3.56bn, up from £2.504bn in 2003-04.
In addition, research conducted by advisory firm Grant Thornton and Lombard Street Research, calculated 3.6 million people will be liable to pay IHT by 2009 - an increase of 70% from 2002.
Ian Luder, private client partner at Grant Thornton, says: “IHT is a ticking timebomb. Our research last year forecast how the tax net is set to grow dramatically and now HMRC’s own figures back up our findings. “
He points out under the current government IHT receipts have more than doubled despite being no change to the rate of IHT, and although the chancellor has announced increases to future IHT thresholds Grant Thornton claims this would only slightly relieve the IHT burden.
It says its calculations reveal, based on the same assumptions, 3.3 million people would still be liable for IHT in 2009, just 300,000 less than those liable under the current threshold.
Luder adds: “It is clear the IHT burden will rise. Given the recent boom in house price inflation over the past decade, there are many more estates which will be caught in the IHT net in the years to come.”
In agreement is Paul Wilcox, chairman of the Way Group, who says rising property values could see the number of people liable for IHT rising even higher, reaching to 4.6 million households by 2020.
He says: “Families should not be lulled into thinking IHT planning is something to be delayed until much later in life. Our research shows the typical age for IHT planning does not kick in until well after normal retirement age.”
Wilcox points out as there are so many changes currently taking place with IHT legislation “it is not rocket science” as the longer you give yourself to prepare, the greater the possibility of diversifying assets which can ultimately be passed on to family without being hit with “massive government tax claims”.
The Way Group says, at the moment, the average amount of money invested by 70 year-olds to try and avoid IHT is £100,000, but Wilcox warns this is likely to significantly increase as families grow wealthier through rising property prices and the maturing of “strategic investments”.
He says a fairly typical estate for older homeowners in the south of England is around £485,000 and without proper planning this means beneficiaries would face IHT on the top £200,000, which at 40% would mean an £80,000 tax bill.
But Wilcox suggests a couple could easily avoid this by setting up a nil-rate band trust which would take the current limit of £285,000 when the first person dies. The survivor then could take an income from the trust without it forming a part of the estate, so when the second person dies the proceeds of the trust are distributed to the children which avoids IHT.
Since the budget however, accumulation and maintenance (A&M) trusts, often used by grandparents wanting to help with school fees for their grandchildren, are now subject to higher charges.
Anything put into an A&M trust over the nil-rate band during a lifetime incurs a 20% IHT charge with and additional charge of 6% on everything over the nil-rate band every 10 years, followed by a further 6% on the money exceeding the threshold when the trust finally pays out.
However Wilcox says these charges can be easily avoided if the money goes into a ‘bare trust’ which means children have access to the money at the age of 18, rather than the traditional age of 25.
He says: “This is just one way of many in which clients can help protect their assets and make sure the wealth stays principally within the family, but we do have the philosophy that no one size fits all.“
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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