Despite change in the inheritance tax planning arena there remain some highly effective solutions. Robert Meyer goes through the options
IHT planning can be very frustrating from an adviser's point of view. No sooner does a solution develop than the legislators, through HMRC seem to move the goal posts again. That said, most people in the UK fail to make even basic preparations for the fiscal consequences when they die. This, to be honest, was not so great an issue up until the last decade, as only a minority ended up paying IHT. However, rampant house price inflation in the 90s and 00s has clearly changed all that and there is no doubt that for many of our clients it is the value of their property that tips the scales.
Although this Chancellor (and his predecessor) has made plenty of noise about IHT, pretty much nothing has changed. Last year, the IHT nil rate band was raised to £300,000 for the current tax year and there are only modest increases pre-announced for the next few years. As a result many of our home-owning clients may now be hit by a tax originally targeted at the very wealthy. The October 2007 pre-budget announcement introducing transferability of any unused NRB from a deceased spouse/civil partner to the survivor went some small way to help more modest IHT "victims" who had not already taken sensible steps to plan their wills.
The problem many advisers face is that, for all but a few seriously rich clients, IHT planning can be a series of informed guesses about what the future holds. This needs to be balanced with the need to retain funds in the estate for issues such as likely longevity or the costs of potential long term care.
The starting point for IHT planning is not necessarily the ability to save the maximum amount, but the ability to do it within a framework of prudent forward planning.
I will look later at options for the client's property, but first consider some options for more liquid assets. First and foremost the client should make use of their gifting exemptions and, where finance can justify it, regular gifts out of income. Advisers will then look at the prudent use of some capital to provide supplementary income using discounted gift trusts or other mechanisms. Then assuming the clients have further spare capital, usually in excess of £50,000, there are several options which have business property relief (BPR) at the core.
Business property relief (BPR) can be used in a number of ways and many investment houses offer tailored solutions. BPR is available on: "relevant business property", which has been owned for two years, and it qualifies for IHT relief at a rate of 100%. "Relevant business property" includes the shares of an unquoted company, (including many AIM company shares) which is undertaking permitted business activities.
Permitted business activities are many and varied, but exclude businesses that make their money by investment, i.e. the trading of stocks, shares or any other financial instrument.
Using BPR has many attractions for IHT planning. Firstly it is effective after two years, and not the seven needed for a potentially exempt transfer. Secondly the asset, and any income derived from it, remains within the estate, so the estate (that is the client) retains control; there is no change of ownership until death - until then there is no gift made. This means that, should the client's circumstances change, the asset can be recovered and used for other purposes, such as to fund long term care, although these assets will then re-enter the estate for IHT purposes.
As with any IHT vehicle, one of the questions is - will the rules change? The government's rationale for BPR is that it encourages investment in small companies - the lifeblood for the future of any sound economy. The IHT issue is then, 'how much does the Exchequer lose though the relief given, versus the long term economic gain?' The simple view is that future Corporation Taxes will exceed any loss in IHT revenue, with so many more business and societal benefits.
There are two principal options for clients choosing the BPR route for their planning: a portfolio approach (normally of AIM shares), or direct investment in a BPR qualifying business.
A well managed AIM portfolio, built from a thoroughly researched market, can diversify risk and manage down volatility, but none-the-less can be subject to the vicissitudes of the equity markets where it can often be current sentiment that undermines value, rather than any inherent weakness of the AIM companies themselves held within a portfolio.
Direct investment is often chosen, not because of the higher potential for returns, but because the investor likes the concept of supporting their own company.
The family home, and the IHT problem it presents, is a much more difficult challenge for the advisers to address. Unlike liquid assets, bricks and mortar cannot be given away or invested in tax efficient structures. Furthermore, as highlighted by the Phizackerley case (April 2007). HMRC is ensuring that allowable IHT mitigation is not being abused, deliberately or inadvertently.
In conclusion, options for IHT planning are much reduced, but those that remain do so either because they make fiscal sense for any Chancellor, or because, rather than unreasonably exploiting obscure tax loopholes, they are based on benign, tried and tested financial solutions.
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