International life offices warn Tory group's recommendation to scrap inheritance tax could leave some worse off
While the latest proposals from the Conservatives' Economic Competitiveness Policy Group to abolish inheritance tax (IHT) may be popular, any such move could have a sting in the tail.
The group, chaired by cabinet minister John Redwood, has urged leader David Cameron to take the bold step of scrapping IHT if elected to power, to address the fact rising house prices have resulted in an increasing number of estates being caught in the net. Under the proposals estates would be liable for capital gains tax (CGT) rather than IHT, but first homes and assets held over 10 years would be exempt. However, the Conservatives have not endorsed the proposals and, even if accepted, the actual changes will not necessarily be in the form of those recommended by the group.
Margaret Jago, technical manager at Aegon Scottish Equitable, points out a move to scrap IHT will most certainly be accompanied by the introduction of alternative revenue raisers, which could in fact leave many worse off.
She is also concerned the proposals could result in some delaying estate planning, which she warns may not be a smart move - especially given it would be based on the assumption the Conservatives will win power, the changes will be introduced, and in a timely fashion, any of which may not happen.
While people had more freedom to give gifts from their estate before Peps were abolished, Jago said careful planning was now essential. She said: "It is now quite difficult for people who have got a significant amount of money and want to retain some control, while working within their nil rate band. What they really have to do is to give away gifts as they go along in order to get the maximum possible out of their estate. It could be disastrous if people wait and see in the current climate."
Jago said if the Conservatives did abolish IHT, one way they could look to raise the shortfall would be to introduce CGT on death which could have a negative impact on those with share portfolios. She said: "That would be worse because anyone who has a share portfolio would end up with potential liabilities, even if their assets were under the nil rate band. You could see quite small amounts of capital passing between people and triggering tax liabilities."
However, international life offices appear to be less worried about the impact of any changes on their business models, claiming a number of compelling reasons still remain to use their products, even if IHT is abolished.
Gerry Brown, technical manager at Scottish Life International, said IHT has been around in various forms since the 1690s and he doubted it would be abolished outright in the immediate future. He said even if changes were made, people would continue to use trusts: "The main reason people use trusts is to control and retain wealth within the family, not for tax planning purposes. I would suggest that since the Finance Act 2006, there are not any real pure tax advantages to using trusts, it's a mixture of tax and maintaining wealth within the family."
Brown added that any changes were unlikely to impact on the sale of offshore bonds, as IHT planning was only one use to which offshore bonds could be put. He said: "People buy life policies because they are a flexible investment tool."
Julie Hutchison, estate planning specialist at Standard Life, agreed life offices had no reason to be concerned. She said advisers would still need to consider the fact that IHT would be replaced with CGT under the proposed changes and assets held for more than 10 years prior to death would be exempt from charge. She explained: "It certainly would not necessarily mean the end of trusts or lifetime gifting. Indeed, it would become imperative to consider lifetime gifting earlier since the current seven-year clock for IHT could effectively become a 10-year clock.
"Just as now, assets might not be best handed over directly to younger family members so the use of trusts could continue to be prudent. Accountants, lawyers, stockbrokers and financial advisers would all continue to engage clients in discussions about how best to plan for the future and these discussions would cover the transfer of wealth to the next generation under whatever rules prevailed at that time. Just as now, lifetime gifts would be part of that landscape."
How, or if, the Labour government will introduce its own measures in response to the Conservatives report remains to be seen. However, Stephen Timms, chief secretary to the Treasury, recently pointed out during a debate in the House of Commons that not everyone is a homeowner, and not every estate includes a house. He said: "Housing makes up only 40% of the assets that are charged to inheritance tax, and it is important to acknowledge the other elements that make up the majority of such assets. Property values are a substantial contribution, however, and that is why we have had a period - and will have a further period - during which the nil rate threshold has been raised faster than the rate of inflation."
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