Going the extra mile

What differentiates an IFA from the crowd, what allows him/her to demonstrate TCF, what proves to the Revenue that a trust is genuine and not merely an artifice which requires no trustee input?  One answer to all these questions can easily be that the IFA recommends a flexible trust solution for IHT mitigation purposes rather than the simple but completely inflexible expedient of a discounted gift trust.

 By recommending a discounted gift trust an IFA is very likely helping the client to avoid either a little (if they live less than 7 years) or a lot (if they survive 7 years) of Inheritance Tax.  This is terrific so long as the client does not have too much reliance on the funds within the trust, especially if his or her circumstances were to change.  Unfortunately, however, to make a serious impact on the potential IHT bill one often has to shift substantial sums out of one’s estate and to do so every 7 years to repeatedly utilise the Nil Rate Band.  In these circumstances one really cannot afford to put the funds into Purdah for the rest of one’s life.

 They do say that men retiring at 60 will probably live until they are 85.  This gives the 60 year old retiree at least 3 stabs at the IHT Nil Rate Band.  Bearing in mind that I am fast approaching the first of those ages myself, it is sobering to think about how the lives of some of my friends within my peer group have changed very dramatically without warning in these later years.  Do the exercise yourself and you will know what I mean.  In my own case I have been ‘best man’ on two occasions for close friends and neither survived to see 60.  A further number of both sexes have become widowed and remarried.  In other cases serious illness has inflicted itself on the family.  Other friends again have had to bail their children out of failing business ventures or bad marriages.

In all of these cases they have needed flexible access to some or most of their money.  This is fine whilst it is in their estate and vulnerable to IHT but impossible if it is tied up in a discounted gift trust.  Having a fixed ‘income’ and no access to capital at all for anyone, regardless of their needs, is not great.

 The Flexible Trust route for IHT mitigation does not offer any discounts on the gift but that can be remedied with a little 7 year term assurance.  What the flexible route does do is make the trust very real because the trustees are obliged to make annual decisions on settlor reversions and loans or appointments to beneficiaries.  The scope for Revenue attack on the basis of artificiality is absent.  It also means that the advising IFA has demonstrably put the client first and is treating him or her incredibly fairly.  Finally it will almost certainly mean that the IFA is not simply replacing an IHT liability with an Income Tax liability – something which generally happens with a discounted gift trust – but is mitigating all taxes.

 So, my challenge to all IFAs out there is to ‘step up’ and show your professionalism by going the extra mile and switch your allegiance to flexible IHT trusts.

Paul Wilcox,
Chairman & Technical Director, WAY Group.

Posted on 30th August, 2007 |
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