Warr on...

“ a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue”

Lord Jenkins

Both as accountants and financial advisers, giving tax advice is a primary focus of our day to day responsibility to our clients. This encompasses Income Tax, Capital Gains Tax (CGT) and Corporation Tax, etc. Whilst clients are in the main eager to plan and structure appropriately to minimise such liabilities, there is often some resistance to planning for Inheritance Tax.

An obvious reason is that we are after all discussing the issue of death. Therefore, there are often emotive barriers to this area of planning.

We often encounter clients not opting to do anything as ‘it is not my problem’ or ‘my family will be well catered for’. Where potential heirs are concerned, they do not want to makes plans, as it can be perceived as another expense or they do not wish to entertain the inevitability that is their parents dying. See point one again.

A common issue is that effective measures often result in restricted access or no access at all to capital, which is responsible for creating the IHT liability. Clearly, for many clients, giving up an entitlement to assets, does not sit well when considering other forms of planning, e.g. retirement planning.

Thus, the most common solution is to effect life cover within trust to provide funds to meet the liability upon death.

Small steps can also be taken towards reducing the assessable wealth of an individual which include utilising the small gift exemption of £250, annual allowance of £3,000 (£6,000 in a year where the previous years allowance has not been utilised) or gifts in consideration of marriage. A lifetime transfer is exempt if made out of income as part of normal expenditure, providing that sufficient income is left to ensure the transferor’s standard of living is maintained.

Pension contributions are a popular option, as they give rise to an immediate reduction in the assessable estate. This is because pension funds are IHT exempt, although pensions come with their own restrictions. Where clients trade via a Limited Company, excess retained profit not utilised in the company’s day to day business activities should be carefully considered. Such monies may be liable to IHT, as they may not attract Business Property Relief (BPR). Pensions are an excellent medium for undertaking both IHT planning and withdrawing funds from the Company into an individuals own name.

Where an individual is happy to give up access entirely, or is able to accept limited access, a more substantial reduction of IHT can be enjoyed. Gifting monies into trust is an option. However, due care should be taken as this is classified as a chargeable lifetime transfer, and may give rise to an immediate tax charge.

This is the first in a series of articles on this subject. In subsequent pieces, we shall take the opportunity of outlining some ideas, which address some of the various investment related IHT solutions available in the market.

Date of Article: 7th February 2008