As house prices increase and more clients are faced with an inheritance tax bill, HM Revenue & Customs receipts from the tax are rising rapidly
In the past 10 years, inheritance tax (IHT) has become much more of a mainstream issue. It is now not just a tax for people with large amounts of cash, but for homeowners whose property has become worth more than the Government's £275,000 IHT threshold.
Figures from the Office of the Deputy Prime Minister (OPDM) show the average house price is now £185,788, while mix-adjusted house prices across the UK are £194,569 in England, £148,471 in Wales, £127,650 in Scotland and £137,112 in Northern Ireland. In London the average house price currently stands at £268,517.
It is these factors that have led to the development of a range of estate planning products to help reduce IHT liabilities.
The offshore market has played a significant role in this development, as trust and tax planning are invariably complex areas, and typically the offshore subsidiaries of life companies are better equipped to handle individual requirements and in doing so offer bespoke financial solutions.
Despite the range of new products being made available to the market, it appears many consumers have remained cautious about entering such unchartered waters.
Julie Hutchinson, national development specialist for estate planning and senior solicitor at Standard Life, says: "IHT planning is far more important today than in past years. This is due to national demographics – as the baby boomer generation moves into retirement, estate planning and IHT planning naturally comes into focus.
"Consumers are now becoming more aware of IHT but awareness varies. Many people still die without leaving a will. Consumers could be made more aware at a younger age, since the younger the client, the more effective estate planning is."
iht impact INcreases
According to the most recent Government statistics available, the impact of IHT on people's estates has been increasing, with 8.8% of estates liable for IHT in the year's 2001/02. In monetary terms, there has also been a growing number in receipts.
Figures from HM Revenue & Customs (HMRC) show the total number of IHT receipts collected in 2004/05 to be £2.9bn, this compares to £2.5bn in 2003/04 and £2.3bn in 2001/02. On top of this, 43% of the value of estates passing on death in 2001/2002 were made up of property tax.
Christine Hall, offshore portfolio manager at Axa Sun Life, claims IHT is no longer a tax on the wealthy and, due to the rises in property prices, more people now find they are inheriting a substantial tax bill along with a relative's estate.
She says: "Since May 1997, the IHT nil-rate band has increased by 27.9% but the average national property price has increased by 163.1%. According to the ODPM, the average house price now sits at £185,788, so it doesn't take much for an estate to be liable for IHT."
Deborah Moon, chartered insurer and head of trusts and tax planning at Norwich Union International, says if the nil rate band had kept pace with house prices the threshold would stand at £541,800. She adds: "It is, arguably, the substantial increase in property values that has pushed many people over the IHT threshold."
Seizing the opportunity
However, despite this increase in property prices and the growing demand for estate planning advice, many advisers are not taking advantage of this, according to Hutchinson.
Moon claims there are now a number of opportunities for intermediaries to expand their financial advice service into this mostly untapped market.
She says: "Financial advisers are moving in the direction of building estate planning into their advice process but not all advisers are fully comfortable with this area, since it represents a completely new area for some."
Simon Ilcott, senior investment adviser at Bates Investment Services, agrees: "IHT and overall estate planning are fairly specialist areas of the market. There are certainly products and research tools available to help IFAs get into this market. However, there does need to be a greater in-depth knowledge.
"It is certainly one of those areas where IFAs can add significant value because there are far too many hunting in the same area of business and the more specialist areas can provide greater income."
Hall also believes advisers could be doing more to offer a more holistic financial planning approach. She adds: "There has been a growing interest and awareness of the IHT market among advisers in the past few years. Interestingly, even with a bear market, people will still invest in IHT mitigation schemes because they obviously still have an IHT issue to solve.
"One area that could make an impact would be greater connection between financial advisers and the accountancy and solicitor firms that deal with private clients.
"These professionals might be the first people to realise the client has a potential IHT liability, such as through will planning, and yet they may not be authorised to give financial advice to help the client address this. Some legal firms have IFA arms, or might be affiliated to an IFA firm, but many – especially the smaller ones – will not be."
Paul Kennedy, taxation and trusts manager at Prudential, adds: "Consumers are beginning to realise there is this IHT problem, but from our research there is still a reticence to act. Part of that reticence might simply be they do not know where to turn to, in order to do something about it.
"There are not that many avenues to approach, a barrister or lawyer will be prohibitively expensive and ultimately not the right way of doing it. There needs to be someone who can give IHT advice as part of the overall advice process and financial advisers are ideally positioned to do this, because they do not just deal with this tax issue discretely, they can deal with it in conjunction with investment issues and whole host of other issues."
It pays to prepare early
However, one of the greatest problems associated with IHT planning, is the fact people do not prepare early enough, Hall explains.
For example, if a person is trying to obtain a life policy that will pay out a sum on their death to help cover IHT, it is going to be more difficult to get life cover, or at least a lot more expensive, if they wait until they are aged over 70.
This is the same for discounted gift schemes, which aim to reduce the amount of IHT liability, but rely on establishing the life expectancy of the client – meaning the younger the client the more effective the plan will be at reducing the amount of IHT liability.
By comparison, Moon believes one of the greatest issues for IHT going forward, is the constant changes in legislation.
She explains: "In recent years there has been a strong degree of legislation concerning IHT mitigation schemes, such as the Lady Ingram and Eversden cases, which were perceived by HMRC as aggressive. Where litigation has failed specifically targeted legislation has been introduced, for example pre-owned assets tax and the new disclosure regime."
Moon says it is likely there will be further legislative changes following a recent ministerial statement by Dawn Primarolo, MP and paymaster general.
Primarolo says: "Experience has taught us that we are not always able to anticipate the ingenuity and inventiveness of the avoidance industry. Nor should we have to. Our objective is clear and the time has come to close this activity down permanently.
"I am therefore giving notice of our intention to deal with any arrangements that emerge in future designed to frustrate our intention that employers and employees should pay the proper amount of tax and NIC on the rewards of employment. We have become aware of arrangements to frustrate this intention and we will introduce legislation to close them down, where necessary, from today."
Moon adds: "Although this statement was made with direct reference to the taxation of employment income, the importance of this as a statement of intent should not be underestimated. Although the new disclosure regime does not currently relate to IHT mitigation schemes, the effectiveness of one very aggressive scheme involving the purchase of second-hand trust interests in foreign-excluded property trusts, was closed down overnight in consequence of the recent pre-Budget Report."
Another area of concern is family property. Kennedy says IHT schemes, which address a person's property wealth, are virtually unheard of. He believes this is largely due to the Government's decision not to raise the IHT threshold.
He explains: "For those whose sole asset is the family home there is a question mark as to whether they can save themselves from an IHT liability. All the solutions we have are driven by the fact the client has liquid assets on top of the property, so they have the option to invest and create a tax saving around that.
"There is no doubt it is still a problem for those who only have wealth around family properties and while there are solutions that can be considered, these need a great deal of thought before people go ahead with them."
Despite this, the range and depth of products currently available in the market do meet the needs of clients who are seeking to mitigate IHT, says Hall.
She comments: "Unless the Government changes the basis on which IHT is applied – for example to remove or reduce the IHT liability caused by property value – there is little more that can be done.
"People with their assets tied up in property sometimes use equity release schemes to provide a capital sum which in turn they invest and wrap in trust in order to reduce an IHT liability.
"But, taking the market as a whole, I think there is a sufficient range of products to meet the needs of clients who are seeking to mitigate IHT. Basically there are two types of arrangement. There are plans which provide money on someone's death to cover the IHT bill and there are plans that are designed to reduce the amount of IHT that would be due in the first place. Under both categories there are many and varied solutions, some more complex than others, but at the end the day an arrangement will have one of these two objectives – to either provide money on death to cover the tax man's bill, or to reduce the amount of the IHT liability."
Growth in average national property price far outstrips the IHT nil-rate band, making more people liable to tax
Greater adviser knowledge is required to take advantage of growing demand for estate planning advice
The earlier a person obtains a life policy, the cheaper it will be
Products for mitigating IHT are as good as they can be given the current basis for applying the tax
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