2006 has done a marvellous job of filling advisers' diaries with client appointments for 2006 and 2007. A-day arrived and still offers great potential for the retirement planners amongst us. Additionally the Budget statement in 2006 made sure those advising on IHT mitigation and investments where not left twiddling their thumbs either.
December is always a good time to recap on what the year has presented us and certainly this year’s changes turned the status quo on its head.
Once we got over the shock on Budget night, we started to remind ourselves how discretionary trusts were taxed and exactly what the impact of entry, exit and 10-yearly periodic tax charges associated with the so-called “relevant property” regime would mean to the end consumer.
Potentially exempt transfers (PETs) have survived but at a price. To benefit from the previously popular regime, your clients will have to use bare trusts and forgo the ability to change the beneficiaries. The issue around how HMRC treats bare trusts for minors is yet to be clarified but it is hoped that they will continue to be outside the scope of the relevant property regime.
HMRC have offered some transitional relief should you wish to amend existing pre-Budget trusts and change the interest in possession, but how many times can you do this before 6th April 2008? Initially we were told it was as many times as you like, but now it appears that HMRC believe it can only be done once. This is another area HMRC will be asked to clarify because the stance seems to have changed over the course of a few months.
On top of any tax that would now become payable on the creation of a chargeable lifetime transfer (CLT), for example a gift into a discretionary trust, each CLT over £10,000 needs to be reported using IHT100 forms. Any time the total of CLTs in any 10-year period exceeds £40,000 then a report is also required. Early indications are that HMRC expect to increase these limits (perhaps to something like £200,000) to reduce the burden of paperwork on us and them, but as yet, no new reporting limits have been forthcoming. They need to progress this soon if they and we are not to be swamped.
Higher reporting limits may be accompanied by a requirement for a little more detail. If we have higher reporting thresholds HMRC may move to a “gross” reporting position. For those using DGT type arrangements this would mean that in determining whether the threshold was breached the whole figure invested, not just the discounted CLT, would be used. Although tax would still be based on the discounted gift, this would provide HMRC with a much clearer picture of the volume and investment level entering such schemes.
While talking about DGTs, the latest guidance provides that HMRC does not expect trustees to automatically ask for a medical every 10 years for policies held in trust (regular or single), where a discount or sum assured are involved. If the trustees were not aware of any change in health of the relevant life then there would be no need to seek further information.
Where a value is required to be calculated they would assume the client is 10 years older. However, what happens if the client dies shortly after the 10-year anniversary? Again, HMRC are considering this point but it would seem possible they might wish to have a 2-year rule similar to that used in IHT on pensions but retain the right to investigate beyond this date should they so wish.
I have highlighted just a few of the issues which need resolving and expect many more to be discussed over the coming months. The opportunity for advice has clearly increased significantly. My diary for 2007 is looking full already.
Colin Jelley is head of tax and financial planning at Skandia.
The views expressed are those of the author and not those of the company he represents.IFAonline
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