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Inheritance Tax (IHT) planning

By Paul Beckwith [email protected]

Paul Beckwith is an International Financial Advisor working with Blacktower Financial Management (International) Limited

The introduction of the transferable nil rate band in October 2007 has certainly simplified the IHT planning.

Prior to Alistair Darling’s announcement in the 2008 Pre Budget Report, it was possible for spouses and civil partnerships to achieve a similar result to the transferable NRB by leaving sufficient assets on the first death to a beneficiary other than the surviving spouse.

The problem is that normally there are not suitable liquid assets that could be specified in the will. This would not include the principal private residence, even if held as tenants in common whereby each party held a specific share, rather than joint ownership where the joint owners collectively own the property and therefore do not own an individual share, which is more common.

This is of particular relevance as the majority of situations that cause concern in the UK is the value of the house that was creating the IHT liability.

Any planning involving the family home has always been difficult and often impracticable. Until the announcement in October 2007, it was considered that the amount of IHT paid would increase considerably as a result of rising house prices and wealth.

In reality, the tax received has reduced considerably in recent years. According to the latest statistics, IHT raised approximately £3.83bn in 2007/8 and only £2.72bn in 2010/11.

This reduction is to a large extent due to the introduction of the transferable nil rate band, the reducing house prices throughout the UK and increase in sophisticated IHT planning.

Two new developments are the introduction of the Disclosure of Tax Avoidance Scheme (DOTAS) rules for IHT with effect from April 6 this year and the proposal (for deaths occurring after April 6, 2012) for a reduced rate of IHT of 36% for those leaving 10% or more of their estate to charity.

As regards the former, one of the aims is to restrict disclosure to those schemes which are new or innovative and this is achieved by exempting from disclosure those schemes which are the same or substantially the same as arrangements made before April 6 this year (known as ‘grandfathering’ provisions). Some of the more popular planning and structures that are exempted are:

• The purchase of business or agricultural assets or with a view to transferring the assets into a relevant property trust after two years.

• Discounted Gift Trusts – a structure normally offered by an insurance company whereby an investment is made in a single premium insurance policy with the settlor electing to take fixed annual withdrawals from the policy. A value is placed on the retained right to receive the withdrawals and this reduces the value of the gift for IHT purposes leading to an immediate IHT reduction. The value of the remainder or the gifted right will fall outside of the settlor’s estate after seven years.

• Loan Trust

• Post Death Planning by changes in the distribution of the deceased’s estate – by deed of variation or disclaimer.

• Transfers of the Nil Rate Band every

seven years

• Insurance policy trusts

• Pension death benefits

Moving forward more individuals will be aware of tax planning and will look for professional advice.

Therefore the more popular strategies will remain intact, particularly if it has been disclosed to HM Revenue & Customs, and has to be disclosed on their tax return. It is possible that one or more of the following strategies will appeal depending on the individual’s attitude to risk:-

• Structured investments qualifying for Business Property relief after the two year holding period

• Life Assurance either to cover the seven year period following a gift or to provide a lump sum to beneficiaries on death.

• Discounted Gift Trusts and Loan Trusts depending on need for income and capital

• Normal expenditure out of income

• Transfer of the Nil Rate Band every seven years into a relevant property trust

• Ensuring that unvested pension death benefits pass into a relevant property trust or direct to a beneficiary.

• Gifts to charity

The latter development is the proposal announced in the March budget that, as part of a package of measures designed to encourage charitable giving, there should be a reduced rate of IHT of 36% where 10% or more of a deceased’s net estate is left to charity.

This relief is due to apply to deaths occurring from April 6, 2012 and will undoubtedly encourage charitable gifts but the extent is difficult to forecast.

The existing Gift Aid and other charitable donations reliefs are also valuable in that they can provide higher rate Income Tax reliefs for lifetime gifts but do not yield the same reduction in IHT.

Depending on the final shape of the relief, it may lead to a policy of advisers suggesting the option of making charitable gifts and for this question to be asked by those drafting wills.

The recent reports by learned bodies suggest that IHT needs to be reformed and repeated reference is made to a tax based on the donee rather than the donor.

However, there appears to be no political will for change during the current parliament and therefore planning must be based on the current IHT regime and the pre DOTAS structures.

The appointed representatives of Blacktower Financial Management (International) Limited are not tax advisers. Before making any financial decisions relating to tax you are strongly advised to seek professional advice from a qualified international tax consultant. Blacktower can introduce you to such a specialist should you require. Please contact us for further details on 289 355 685.

Blacktower Group has offices in the United Kingdom, Gibraltar, Portugal, Spain and France. Blacktower Financial Management (International) Ltd is licensed in Gibraltar by the Financial Services Commission (FSC) License No. 00805B Blacktower Financial Management Ltd is Authorised and Regulated in the UK by the Financial Services Authority.