Inheritance Tax mitigation
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.