Tax & Accounting News
Inheritance Tax - the continuing need to plan
by Harris Lipman consultant Peter Legg
14/08/2009
The recent Budget Speech
With the dearth of taxes currently coming into the Treasury’s coffers (VAT receipts down because people are not spending, Income Tax down because people are losing their jobs or taking a pay cut, Corporation Tax down because companies are not making profits as they have done in the past, Stamp Duty down because the housing market is suffering from the recession) and the recent bail out by the government of banks and other institutions, it is undeniable that the Government needs to raise additional revenue. There was a fear that there may have been a return, in the recently presented Budget Speech, to a harsher Inheritance Tax (IHT) regime and a blocking of several IHT Planning opportunities.
As it turned out, from an IHT perspective alone, the Budget Speech was something of a damp squib; none of the IHT Planning ideas currently available were affected. The only amendment of note is that for the first time, agricultural property outside the UK but within the EEC will, subject to the relevant conditions being satisfied, be fully relievable from Inheritance Tax.
Many high net worth individuals and their professional advisers may have been waiting anxiously for the Budget, not wanting to commit themselves to an IHT Planning exercise in the light of that uncertainty.
10 specific planning proposals
- Lifetime giving; one of the only silver linings to the cloud of economic downturn is that the value of certain assets (property, quoted shares, etc) have fallen quite dramatically, possibly to below or nearly below the acquisition cost. Given that every gift is a disposal for Capital Gains Tax (CGT) purposes, it would be sensible to examine share/property portfolios to identify assets which have dropped in value like this such that they can then be gifted to one’s chosen beneficiaries – depending of course on the income loss being affordable – absolutely.
- The family home; given the plethora of anti avoidance provisions introduced in successive Finance Acts to block the more popular tax saving structures dealing with the family home (of the annual IHT yield of approximately £3.5billion, over 40% is thought to come from the family home), professional advisers may be excused for thinking that from an IHT Planning perspective, the matrimonial home is off limits. That is far from the truth; there are a significant number of structures that would serve to remove the home from the potentially taxable estate. This list (not exhaustive) would include giving the house to the children and buying back the lifetime right to live there, the children buying the freehold reversion to the house, one spouse selling their interest to the other spouse in return for an IOU which might then be gifted to the children, raising finance on the house (at a time of low interest rates) to fund a gift etc.
- For those in business (whether a sole proprietorship, a partnership or a non quoted trading company), seek advice on whether the business interest qualifies for 100% relief for IHT by reason of business property relief. Ask the accountant or tax planner to carry out a business property relief ‘audit’; has the interest been held for two years? Is the majority of the assets on the Balance Sheet used for trading purposes (surplus cash or investments may forfeit the relief)? Is there in effect a binding contract for sale in the Deed of Partnership/Shareholders’ Agreement? Is the business a trading or an investment entity? If the relief is unavailable, what might be done to earn it?
Once that audit has been done, the opportunities for what might be called succession planning can then be considered. - Maximising exemptions and reliefs; the IHT legislation allows designated sums to be gifted every year, for surplus income to be regularly given away (to avoid it being capitalised in an estate and thus aggravating the potential IHT liability), for wedding and charitable gifts to be made and for certain assets to be totally exempt.
The ultimate IHT saving can range from modest to significant and the opportunities must be addressed. - Income preservation; usually the all encompassing ‘gift with reservation of benefit’ rules prevent assets being given away during a person’s lifetime and then enjoyed directly or indirectly by the donor. Such gifts would be set aside and the value of the gifted asset still treated as part of the donor’s estate for IHT purposes. This would extend, for instance, to the holiday home in the parents’ names, given to the children either in whole or in part and which the parents visit frequently.
There are structures to put in place that can preserve access to income arising whilst alienating the right to capital (a settlor interested trust, for instance) or where the reservation of benefit can be paid for. There are also structures that might be exploited to retain ownership of a particular asset – and ongoing enjoyment of income arising – by one spouse. - Wills; it remains the unfortunate fact that significantly over 60% of us have no Wills. Not only could this be a tax effective and flexible document that takes away uncertainty and confusion on a death, it also avoids the somewhat arbitrary intestacy rules that come into play where there is no Will. These could lead not only to financial anxiety for the surviving spouse but an immediate charge to IHT on the first death.
It would also be important to consider Wills for unmarried and childless adult children who have assets; those assets might otherwise pass to the parents on the prior death of their children, thus exacerbating the potential IHT liability attaching to the parents’ estates. - Trusts; a much abused stalwart of estate practitioners, trust structures allow avoidance of CGT, continuing control over the asset in question, ring fencing and protection from greedy beneficiaries or persons claiming through them such as ex spouses or creditors. A significant downside would be the 20% attendant IHT charge on all transfers to trustees over £325,000 but this can be avoided or managed.
- Tax planning for the terminally ill; whilst an extremely difficult subject to broach, such people are unlikely to survive two years (to exploit investment in business assets such as shares on the Alternative Investment Market) and certainly not seven (for lifetime gifts to fall out of account).
There remain a number of strategies that might be pursued though they are traditionally expensive in terms of professional fees. - Past IHT Planning structures should be reviewed to check their ongoing relevance (to the family circumstances) and tax efficiency. Should they be terminated – and what would be the tax implications of so doing? – or augmented? The tax rules relating, for example, to trust structures have changed radically over recent years and the trustees need to know their options.
- And finally, buy a farm in France (or somewhere in the European Economic Area). Those idyllic dreams prompted by Toujours Provence or a family holiday can be achieved with IHT advantage in that, under the recent Budget Speech, such farms could also be an exempt asset for IHT, subject to certain statutory conditions being satisfied.
The Conservative Party promise concerning IHT
Many would no doubt be tempted to defer any planning until what they see as an inevitable Conservative Party victory in next year’s General Election, given the Shadow Chancellor George Osborne’s affirmation at the end of 2007 that an incoming Conservative Government would increase the tax free threshold for IHT from the current £325,000 (£350,000 from next 6 April) to £1million. However, a delay may be a mistake.
Firstly, the election will not necessarily produce a Conservative victory. Secondly, such a raising of the IHT tax free threshold is unlikely to be a priority of an incoming Government; they would have a concern that this would be seen to be a tax ‘give away’ to the rich and as such ‘old Conservative’. Indeed, Ken Clarke, the Shadow Business Secretary, recently announced that the policy would not be a priority and was merely ‘an aspiration’, as a Conservative Government would concentrate on reducing state debt.
But most importantly, a decision to defer an estate planning exercise for this reason would be a prima facie mistake as it is likely that the person making such a decision would survive a Conservative Government; they may lose the opportunity – by being older and thus actuarially less likely to survive a stated term of years – to make a gift which they survive by seven years to gain complete exemption.
A final thought; if Income Tax is to be levied at 50% for high income earners and given that IHT is perceived to be a tax payable by rich people, what is to prevent the uniform IHT rate of 40% being similarly increased to 50%, at least on larger estates?
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