Month: August 2010

Inheritance tax – No time to lose!

The wealthy have no time to lose in planning their IHT mitigation

The recent announcement that inheritance tax (IHT) mitigation via transfers into trust is likely, in future, to be included in the Disclosure of Tax Avoidance Schemes (Dotas) regime is not good news.

The Treasury and HM Revenue & Customs (HMRC) proposal is what was expected following the Finance Act 2010’s blocking of two specific trust schemes which dramatically (and arguably artificially) reduced the value of assets gifted into trust.

The new government has firmly declared its IHT plans by freezing the inheritance tax threshold, the nil rate band (NRB), for five years, it is backing this approach by supporting legislation to plug as many “leaks” as possible.

The consultation document introducing the Dotas requirement does not seem unreasonable in the circumstances, as it does not impact on most conventional IHT mitigation work using the various trust schemes that are widely available.

So what exactly is being suggested as far as disclosure is concerned?

The new rules will not require any existing schemes used extensively by Bluebond  and well known to HMRC to register, such as flexible and discounted gift schemes, because they are being ‘grandfathered’ into acceptability. The only new trust schemes that have to be registered will be those that involve:

  • chargeable transfers beyond the donor’s current allowances, including any unused NRB. In other words, where property becomes ‘relevant property’;
  • an ‘advantage’ in relation to the IHT entry charge: an advantage being defined as the avoidance, reduction or deferral of a charge.

This avoids any requirement to disclose straightforward situations where an individual simply transfers property into trust and relief, or exemption is available in the same way it would have been had the property been gifted directly to another individual. This is generally the case with most of our of trust-based mitigation arrangements.

The government’s proposal is only at the consultation phase so it is too early to be unequivocal about the requirements for plans launched in the future.

However, the grandfathering facility will ensure all existing plans of which HMRC is aware and future plans that adopt the same principles as existing plans will be safe. This is the nearest we have ever come to having a blanket approval from HMRC of all existing plans.

What does this mean for tax planners and their clients?

The proposals are bad news for taxpayers who have been relying on either the indexation of the NRB or, more recently, the Tory commitment to a transferrable £1 million NRB, to lift them out of potential liability. The coalition government has a much less generous approach to inherited wealth than that promised by the Tories.

Freezing the NRB for five years when the knock-on impact of quantitative easing is likely to be rampant inflation down the line is serious. Inflation is already rearing its ugly head, no matter what interest rates are doing.

Looking further ahead, there has been plenty of speculation that the coalition might continue until another term of government, especially if next year’s referendum delivers backing for the alternative vote electoral model. This will mean the cautious approach to raising IHT allowances will continue.

This means taxpayers who are currently close to a potential IHT liability will be severely disadvantaged by the NRB freeze, assuming inflation of 4% over the next two years followed by 8% for three years.

A potential liability of nil at the beginning would become a liability of around 40% of £117,814 after five years that is more than £47,000, simply resulting from inflation.

Hope for the best but prepare for the worst

IHT planner Charles de Lastic constantly reminds his clients to ‘hope for the best but plan for the worst’. This has served him well over many years of capital tax planning.

The message here is that everyone who, since 2008 when they were given false hope by the last labour goverment, has put off their IHT mitigation planning has no time to lose.

Remember: hope for the best but plan for the worst; start your IHT mitigation planning today.

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Inflation falls but is still above target

The cost of Transport fall, but prices for food rise as inflation drops to 3.1%, but is still well over above the 2% target.

Inflation dropped down in July, but remains far above the government target imposed on Bank of England.

The annualised 3.1% rise in consumer inflation for July was down on June’s 3.2% increase, but still above the 2% target. This means that the BOE governer will have to write yet another letter to the government explaining why price rises are above target.

Bank of England Governor Mervyn King blamed anumber of one-time factors, including the rise in sales tax in January, past rises in oil prices and the continued effects of higher import prices following the devaluation in the British pound since mid-2007.

King reiterated the bank’s projections that inflation will remain above the target until the end of 2011 — a year longer than it was predicting just a few months ago — but would then fall back as the effects of higher sales tax, energy price rises and import price increases drop away.

King said last week that inflation was likely to fall back below target in 2012, but in Tuesday’s letter to Treasury chief George Osborne he acknowledged that the recent strength in inflation had surprised the bank’s rate-setting committee and “how fast and how far inflation will fall are both difficult to judge.”

Transport costs were the main factor in the slight drop in inflation with the price of second-hand cars falling between June and July. Petrol prices also fell.

Conversely, food and non-alcoholic beverage prices added upward pressure on the overall figure. With the current prices rises in wheat this is likely to continue.

The same factors also saw the RPI measure of inflation – used for indexation of pensions and state benefits – drop slightly from an annualised 5% to 4.8%

The Bank of England said that inflation will stay above the 2% target for longer than it forecast back in May. The Bank’s new forecasts showed inflation above target until the end of 2011 but falling after that as ‘temporary’ factors such as the increase in VAT next year fade.

Inflation in the UK is higher than in the EU as a whole, where consumer inflation was measured at 1.9%.

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Consumer confidence

Consumer Confidence

This week saw consumer confidence drop to its lowest level for 15 months, it also saw the pound falling against the US Dollar as investors became nervous about the state of the world economy.Consumers are perhaps worried about the level of disposable income they will have over the months ahead and the emergency budget and inflationary pressures such as rising food and petrol costs are adding to this worry.

U.K. house prices dropped again in July and will, probably, struggle to gain for the rest of the year. Prices in England and Wales rose 0.1% from June, when they fell by the same amount. Values are up 8.1% from a year earlier to an average £220,685. The decrease in house prices in July was the first since February and came as the number of transactions rose 11% from June to about 72,100 as more people put their properties on the market.

Regional data for June showed the drop in average prices across England and Wales was led by a 0.5% decrease in the Yorkshire and Humberside region, values in London fell 0.4%.

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How long till the economic outlook will be considered “normal”?

Bank of England governor Mervyn King believes it will be a long time before the economic outlook will be considered “normal”.

Wider economic problems around the world underline the fact that we cannot be confident that the recovery in demand, output and employment  in the UK will be sustained.  The fiscal tightening measures proposed by the Government will not choke off recovery, but it will slow economic growth over the next two years.

Of course it is encouraging that we have learnt recently of the strong 1.1% estimate of GDP growth in the second quarter, however we must be careful not to read too much into one number.  We continue to face the challenge of rebalancing the economy away from consumption towards net exports and raising our national savings rate.

The new coalition’s plans to cut the deficit are certainly ambitious but with the additional tightening set to come in the second half of the parliamentary term, the recovery should be firmly entrenched and the economy should be able to deal with the headwinds from the Budget.

On the assumption that the government is able to implement the overall reduction of £40 billion set out in the budget, the UK growth is likely to  struggle to reach 1% this year but should gradually speed up in the following years to give the UK a high-quality recovery based on trade and investment.

According to Ernst & Young base rate will remain at a record-low 0.5 % until the end of 2013. They said it would be necessary to keep base rate low in order to offset the effects of the Government’s spending cuts and to prevent inflation falling below 1%.  If this forecast is correct should you consider how your savings are invested?  Is cash still a good option or are other low risk, higher yielding products more suitable for some of your savings?


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