Don’t sit on the fence – you’ll only get splinters!

With at least one budget and at least one election in prospect for 2010, WAY Investment Services Ltd’s Technical Manager Mark Benson says that there is no time to delay before putting in place IHT mitigation plans for your clients. Given the average gestation period of an IHT case from agreement to settlement and with the (first) budget possibly a month away, the time to start is really today.

A recent IFA enquiry caused me to open the file of a WAY Inheritor Plan settled in February 2004 with an investment of £1,100,000. A number of thoughts sprung to mind such as how growth of over £300,000 in the investment value since then is safely out of the estate of the settlor and thus not subject to IHT on their death, and how in a year’s time the whole trust fund should also fall out of the estate at the end of the 7 year inter-vivos period. The overriding thought that came to mind however was “£1.1m transferred into a flexible trust – those were the days!” Whilst cases of such a size are unfortunately rather rare, it is interesting to reflect on how easily planning could be put in place for such amounts prior to the surprise change to the IHT rules in the 2006 Budget, which shut the door on PET based transfers to discretionary or interest in possession settlements. Nowadays unfortunately our settlor could not put much more than the amount of growth they have enjoyed into trust without breaching the nil rate band and generating a lifetime IHT charge of 20%.

There is a cautionary tale here as 2010 promises to be something of a white knuckle ride for tax planning as the political parties try to balance the challenge of dealing with the financial crisis with the desire to be generous in their manifesto promises ahead of the election. What is certain is that we must have one budget and one election this year. However, whilst May 6th remains a solid favourite for the date of the election – in particular since local elections are already scheduled for that day and cash-strapped local authorities could do without paying for two polls within a few weeks – the odds on the Conservatives as favourites to win that election have lengthened somewhat as the opinion polling shows a narrowing of their lead. With the likelihood of a change of government and the possibility of a hung parliament we cannot discount the possibility of at least one more budget and perhaps one more election this year.

When considering the dismal state of the nation’s finances and the unconvincing emergence from recession, it would seem that there is one thing we can be certain about: The forthcoming budget(s) will make the tax code more hostile to our clients’ income and capital. It is possible that the availability of trust based IHT planning might be attacked itself, akin to the changes introduced in 2006. Moreover there is also the strong possibility that an unfavourable change to the rate of income tax, CGT or IHT would dilute the savings on offer. Some may argue that the Conservatives have pledged to increase the IHT nil rate band to £1m in the first term of a prospective government, however we feel that given the fiscal challenges that lie ahead this might be a policy that remains an aspiration only. Any prospect of a first term introduction surely lies nearer the last year of the parliament.

The prospect for the next few years is that IHT will remain a challenge to succession planning, and if another aggressive attack on the use of trusts is made we might in time look back on the present as another golden opportunity that has passed. Where clients are hesitant to put plans in place due to the uncertain future, their minds can be put at ease by the recommendation of flexible arrangements such as the WAY Inheritor Plans. Our plans can adapt to the client’s changing circumstances by granting flexible powers to the trustees and also to changes to the rates of lifetime taxes by (uniquely in the market) offering access to collective investments and offshore bond wrappers. Furthermore, since clients are limited to investments within the nil rate band it is necessary to start at a younger age and (hopefully) make repeated use of the nil rate band over the years to come.

At some point in 2010 a government will face up to the reality of our financial crisis and present the bill for the remedy to taxpayers.  Those still sitting on the fence at that time will suddenly feel the splinters!

Mark Benson, TEP CertPFS,
Technichal Manager, WAY Investment Services Limited.
19th February 2010.

Posted on 19th February, 2010 | Tags: IHT Mitigation |
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Plan for the worst!

Hope for the best but plan for the worst! Most folk like just enough uncertainty to keep life interesting but not so much as to make them over-anxious. Unfortunately, the current environment puts many people in the second camp.

We are currently facing a ‘flu pandemic and whilst most of us logically know that the chances of it affecting us very badly are relatively slim, we still hate the suspense of waiting our turn at the snuffles. This feeling is exacerbated by the Press, especially when they splash all over the newspapers that yet another apparently healthy individual has (sadly) died from swine ‘flu.

In the wider world the economic and stockmarket uncertainty is also corrosive. Unemployment is rising fast and has a long way to go yet, public sector, corporate and private debt levels are testing and house repossessions and bankruptcies are likely to continue heading northwards. A prime example is the news emanating from Lloyds TSB, which is releasing all its bad employment news incrementally (hoping we won’t notice the big picture). Its recent announcement, which takes target group redundancies above the 8,000 mark, is unlikely to be its last.

And again, the Daily Mail recently reported that senior Tories are now privately admitting that the aspiration to raise the inheritance tax threshold to £1 million and scrap stamp duty for first-time buyers on homes worth up to £250,000 may be delayed because of the recession. One could say that Ken Clarke had already let that particular cat out of the bag in March but it was vehemently denied by the Cameron camp at the time. Personally, I am old enough to know that very few new governments fulfil their manifesto promises made whilst in opposition – and quite understandably so, since they construct their manifestos on grand assumptions which are often far from the subsequently discovered truth (once they actually see the books)!

This leaves investors very poorly served, especially those more elderly and wealthy individuals who should be tackling their Inheritance Tax (IHT) situation sooner rather than later. As one of my oldest and longest-standing friends likes to say: “Hope for the best but plan for the worst.” This is what I would recommend to all those taxpayers who are worrying about whether they should take action to avoid or reduce IHT.

Yes, you should take action. Take all the various steps you need to reduce your potential tax, including getting the 7 year clock ticking now and/or lending financial assets to specialist trusts at currently depressed values. If it subsequently transpires that the planning is not needed then any carefully considered planning can be effectively unwound. Using the right vehicles will incur little extra costs beyond the standard costs associated with establishing any other kind of investment strategy. This warning may sound alarmist but the uncertainty over IHT will be with us for at least another year – until the next General Election – and even then the news is likely to be negative for many years to come. And especially so at a time when there will have to be massive cuts in public services and across the board tax increases to re-balance the nation’s books.

The bigger uncertainty at the moment for most people is the state of the UK economy. Recent stockmarket rises would seem to imply that the recession is all but a thing of the past. And yet many serious pundits are warning of much worse to come. Logic does appear to suggest that the combination of sky-high debt levels across the public, corporate and personal sectors and the delayed effects of the economic slump have not fully worked through the system. With banks still re-building their balance sheets (and likely to continue to do so for some time), lending is not going to improve any time soon. Whilst many individuals and companies have been able to manage their deficits over the last year one can imagine that a continuation of the current credit and earnings drought will eventually take its toll.

My own view is that this cycle will, just as with every previous cycle, pass and we will see recovery. The uncertainty for everyone is when that is likely to happen. With the banks apparently terrified to lend to property buyers, entrepreneurs or even established companies; with southern and eastern Europe all on the verge of bankruptcy; with UK unemployment likely to sail through the 3 million mark leading to more distressed debt and property repossessions; with most stockmarket companies likely to slash dividend rates over the coming months and with the threat of a return of inflation just around the corner, the uncertainty will continue until at least the autumn and probably a great deal longer.

It seems appropriate to end by reminding you again of my friend’s apt catchphrase: “Hope for the best but plan for the worst!” And to reiterate what I’ve already said elsewhere, that this is what I would recommend to all those taxpayers who are worrying about whether they should take action to avoid or reduce IHT. In fact, I would only add one rider to all of the above: “- and do it now!”

Paul Wilcox,
Chairman & Technical Director, WAY Group.

Posted on 28th August, 2009 | Tags: Financial Planning |
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