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Inheritance Tax Planning
(26/11/2006)
With the UK
government’s target of boosting inheritance tax revenue from £3
billion to £10 billion per annum, the implications for British
expatriates with an estate in excess of the £275,000 threshold
will be significant. The possible re-introduction of capital
transfer tax, sliding inheritance tax scales and a reduction of
the 100% relief on family businesses and agricultural property
will remove many of the standard components of estate planning.
So why are so
many individuals failing to maximise today’s estate planning
options? In fact, many are blithely unaware that their estate
planning mistakes, often due to a fundamental misunderstanding
of the complex inheritance tax legislation, will add a
significant amount to the eventual tax bill. There are many
wealthy individuals who are failing to exploit the basic
options, from potentially exempt transfers to trusts, to
safeguard their assets for future generations while providing a
secure, financially comfortable environment during their
lifetimes.
In addition,
inheritance tax rates are likely to move from a set 40% on all
estates to a sliding scale where the rate rises in line with the
value of the estate. This, again, harks back to the 1970s when
rates reached 75% on the largest estates. The indications for
this are clear, with a leading left wing think tank announcing
just before Christmas 2004 that the rate should be 50% on all
estates over £763,000.
Moreover
assets currently exempt from inheritance tax, including
agricultural property and shares in a family business are also
on the target list, subject to specific limitations, with relief
expected to be reduced from 100% to 50%.
Unfortunately
misinformation and misunderstanding about inheritance tax
legislation is rife - resulting in expensive mistakes which
undermine the financial security of individuals during their
lifetime.
For example,
too many people are unaware that if a gift is made, no benefit
can be derived from that gift in any way, otherwise it will
still be deemed part of the estate for tax purposes. For
individuals gifting a family home, for example, this is a
significant issue. Not only are they failing to reduce the
inheritance tax due but they are placing themselves at risk of
eviction should a breakdown occur within the family. Nor do many
people realise that an asset disposal made for inheritance tax
planning is liable for capital gains tax. An individual gifting
quoted shares to heirs may get a shock to receive the resulting
capital gains tax bill.
And,
critically, while many people believe a business or partnership
is exempt, that may not be the case if that business holds cash
or investment assets. Assuming such exemption applies is an
expensive mistake.
Change is on
the cards and individuals need to make the most of tax efficient
opportunities today. From potentially exempt transfers, ensuring
there is no benefit from the gift, to deeds of variation,
allowing a will to be changed, or written, posthumously up to
two years after death, or structures to safeguard property
portfolios and investments, many tax avoidance options are on
borrowed time. Estate planning has become a complex discipline
and one increasingly eschewed by solicitors and many IFAs as a
result.
One benefit
is that this complexity, combined with the controversial
introduction of the back dated pre-owned asset legislation, has
prompted a dramatic reduction in the number of one-size-fits-all
products and schemes. Good estate planning is not about buying
insurance products to cover the expected inheritance tax
liability. It is about understanding the needs and expectations
of individuals and accommodating their wishes and concerns about
family members within a flexible, regularly reviewed strategy
that can change if and when required.
Should you
wish to speak to one of our fully qualified financial advisors
with regards to inheritance tax planning,
just
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