As the smoke clears we begin to see the flames

So the phony campaign is now over. After four weeks of argument as to whether £6bn or £10bn of cuts now or next year would be the right way to deal with a £163bn deficit, the election delivers a government and a collection of policies that nobody voted for. Whilst the election seemed to take place in a surreal parallel universe, we now have a real, if unexpected, government and we are beginning to see the truth behind the false debates. A painful fiscal pinch is beginning, as taxes are hiked and public spending cut.

One of the first casualties of the re-emergence of the real world is the Conservative party’s manifesto commitment to increase the IHT nil rate band to £1m. The Tories had clung on to this pledge despite the best efforts of Ken Clarke, in their own ranks, and the wider weight of common sense, that said the policy was not a good or affordable priority. Mr Cameron hinted in the final leader’s debate that the increase would not be top of the agenda in the event of an outright Conservative victory. In any case, events have now moved on and the policy has been kicked firmly into the long grass. The nil rate band is £325,000 and we will either stay frozen as per the outgoing government’s plans or at best might enjoy some annual indexation.

The killing off of this policy is in many ways a good thing for financial planners. The move restores a good amount of certainty to the market: We know IHT is here to stay and we know at what level it bites. Some planners will have agreed a “wait and see” approach with clients who would be taken out of the IHT net by a £1m nil rate band. The difficulty facing clients in such a position was how long would they have to wait until they knew that the nil rate band was to be raised high enough? Well, we haven’t had to wait long and now we have seen. It is therefore time to revisit those clients and to get on with the business of planning for IHT mitigation.

Whilst the position for IHT is much clearer, we have a little longer to wait to know what changes the new government will make to lifetime taxes. We know the news will not be good, and we also know that we only have to wait until the next Budget is delivered by new Chancellor Osborne on 22nd June. The outgoing Labour government had already brought in a new 50% rate of Income Tax and we know from the coalition agreement that the new government is to make CGT bite harder upon non-business assets. At present details are scant regarding the level of the rate, the exemptions and the date of introduction, so we will have to hold our breath for a few weeks more until Budget 2010.2.

Frequent changes to the tax regimes are of course very unwelcome for long-term investors and their advisers. The current flat rate CGT regime only dates back to 2008 and the previous (taper relief) regime only survived about 10 years. Such upheaval becomes a great hindrance for individuals who are trying to put in place a long-term investment strategy. The current changes to taxation will of course mean that advisers will have to, once again, review the provisions in place. In the current climate it may be hard to find a safe haven from a demanding Treasury however. So what strategies are available to advisers upon reviewing their clients’ portfolio options?

The first thing to keep in mind is that whilst there may be choppy waters ahead, in the longer-term we may find that we just have to get through a difficult but short period where taxation rates are unusually high. One would hope that in a few years time healthy growth will have returned to the economy and the deficits will be under better control. The first option may therefore be to just ride out the storm, keep investments in place and wait until a more favourable environment allows profits to be taken with less penalty. This will suit many long-term investors who do not rely on encashment of investments to meet income needs or shorter-term objectives.

Whilst the ultimate drawing of profits may be able to be delayed, most investors will want their portfolios to be actively managed and for their portfolio asset allocations to be adjusted from time to time. It is clearly unhelpful if considerations of the tax chargeable events that would be generated have to interfere with such activity. The answer, of course, is to ensure that such activity takes place within a suitable investment wrapper. Fund of Fund portfolios will therefore be very useful where it suits the client to be ultimately exposed to CGT on the realised profits, as they deliver cost effective active management within a Unit Trust or OEIC wrapper. Where an Income Tax environment is preferred a life insurance bond will provide similar shelter.

Investors with funds in trust, such as WAY Inheritor Plan holders, will now have the forthcoming changes to the CGT regime to absorb on top of the recent Income Tax changes. Holders of the classic Unit Trust versions of the plans already benefit from the inherent tax efficiency of the nil-yielding WAY Global Portfolio funds of funds. As the choice between the CGT and Income Tax environment becomes more critical it will also be good to know that WAY, uniquely, offer access to their funds within the Inheritor Plans both as direct Unit Trust/OEIC investments and within offshore bond wrappers.

The most flexible variants of the plan such as The WAY Flexible Inheritor Plan, The WAY Gifts from Income Inheritor Plan and the WAY Duo Inheritor Plan can also perform a key role in adapting a client’s overall investment strategy to the new tax regimes. As well as the choice of tax environments identified above, these plans also allow the trustees to determine whether or not the flexible reversions take place. Thus the adviser can recommend that more or less (or none) of the client’s income needs are provided for by the Inheritor Plan and balance the reversions with drawings (or not) from other sources. This judgement can of course be made year by year and respond to changing tax regimes and client needs – an option that is not available where a typical discounted gift scheme is used.

In summary then we can present our manifesto for a new government:

• Now is the time to revisit IHT planning that was put on hold
• Review tax wrappers but don’t chase the tax tail – it may be better to ride out the storm
• Make sure investments have the best income / growth profile for the client
• Shelter active management within a suitable wrapper
• Maximise flexibility – only choose plans that can adapt to client needs as the winds change

Welcome back to the all too real world!

Yours sincerely,
Mark Benson TEP CertPFS
Technical Manager, WAY Investment Services Limited
28th May 2010.

References:
1. Preliminary Budget Report, Data & Statistics – ‘Budget 2010, UK Stationery Office, HC 451, 24th March 2010′
2. Labour, Conservative & Liberal Democrat pre-Election Manifestos – May 2010

Posted on 28th May, 2010 | Tags: Coalition Government, IHT Mitigation |
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IHT – avoid but don’t evade

It has been a frenetic few years for IHT mitigation.  Pre-owned assets tax (POAT) in 2004, the taxation of trusts in 2006, false promises by the Tories in 2007 and a major fall in asset values in 2008, have all kept taxpayers and financial planners well and truly on their proverbial toes.

Now Alastair Darling’s pre-budget report (PBR) has thrown yet another cat amongst the pigeons.  The double whammy this time is the removal of a previously legislated increase in the Nil Rate Band/NRB (under the Finance Act 2007, the personal nil rate band was due to rise to £350,000 in April 2010, but it will now stay at £325,000) and an attack on some specific strategies which have been using legislative loopholes relating to trusts.

Some commentators have speculated as to whether Darling’s comments in the PBR, about future legislation regarding trusts, spell the end for IHT mitigation as we currently know it.  In fact HMRC has no desire to upset conventional IHT planning using long-accepted trust-based solutions – all of which were brought into the taxable ‘relevant property’ regime in the Finance Act 2006.

HMRC and the Treasury remain fair and even-handed in their approach to collecting IHT.  All absolute gifts, at any level, remain potentially exempt transfers (PETs), whilst chargeable gifts to the full extent of the taxpayer’s NRB can be made every 7 years without any tax being incurred.  Furthermore regular gifts of any amount, from surplus after tax income, are immediately exempt.  All of these facilities remain, as do the various long-established trust schemes that have been available over the last decade and more.  It is flagrant abuse and the exploitation of inadvertent loopholes which is being attacked in forthcoming legislation.

As Nick Chadwick (well-renowned architect of some of the signature IHT mitigation schemes of the last two decades) recently explained to me “the acceptable spirit of tax avoidance has to reside within the house of fair play as secured in case law. Thereby evolving rules, where the law is inevitably silent on many issues, offer no protection from retrospective legislation at worst and swift blocking at best. HMRC will give confirmation of schemes that fall within the acceptable spirit of IHT avoidance. Failure to obtain this will be fatal for some providers, sooner or later”.

There are many conventional trust arrangements available, now and for the foreseeable future, which permit taxpayers to efficiently remove assets from their chargeable estates, whilst maintaining suitable ongoing flexibility for both themselves and their beneficiaries. There is therefore little need to seek out schemes which operate outside the confines of acceptable tax mitigation.

By far the bigger problem is the inertia suffered by many potential IHT payers who still seem to think this tax will somehow either mysteriously disappear or their estate values will be overtaken by the Tories enhanced NRB.  It should be clear to everyone at this point that for the foreseeable future there will be no appetite for either reducing or eliminating the impact of what is still seen as a wealth tax.  Not only does the ongoing budget deficit make it a non-runner but current public ambivalence toward MPs, bankers and others perceived as wealthy and privileged makes the easing of Inheritance Tax politically unthinkable.

George Osborne recently admitted on the Andrew Marr show that the Tory ambition to substantially raise the NRB was now pencilled in for later in their term of office.  But if New Labour can reverse actual enacted IHT legislation after only 2 years we surely know what expediency to expect from the Tories during their own turn in government.

With asset values likely to continue their recovery over the next year or two the business of carefully planned and executed IHT mitigation (particularly taking full advantage of somewhat depressed current values) is likely to blossom once more.  But be warned; HMRC will take an increasingly dim view of those attempting to exploit schemes operating on principles which rely on “reading between the lines” of existing tax legislation and are against the spirit of the law.

The two recently closed loopholes related to the purchase of (exempt) interests in excluded property trusts and the absolute gift (and therefore potentially exempt transfer) of retained reversionary interests within trusts. 

The first of these permitted a purchaser to buy (exchange taxable cash for) an exempt family interest in an exempt trust, thereby removing any future potential IHT charge from that value.  The second loophole involved the immediate and absolute gift of a retained reversionary interest which had already benefited from a discount to its value.  In this arrangement the taxpayer used a two step process to convert an otherwise chargeable gift into a combination of an initial small chargeable gift swiftly followed by a larger potentially exempt transfer.

In conclusion then, with the Tories recently announcing, that based on their analysis of ONS statistics in the newly published ‘Wealth in Britain’ report, some 4 million taxpayers are still likely to incur an average IHT bill of £60,000 (Guardian newspaper 29 December 2009) there is no time to lose.  Help your clients avoid this heinous tax by engaging in good down-to-earth IHT planning including, where necessary, the use of one or more of various highly-effective but conventional trust-based mitigation arrangements which remain available.

Paul Wilcox,
Chairman & Technical Director, WAY Group.

Posted on 22nd January, 2010 | Tags: IHT Mitigation |
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