Inheritance Tax (IHT) – Budget 2011 roundup

Inheritance Tax (IHT) – Budget 2011 roundup

1. Charity donations encouraged
2. No changes to basic rules
3. No review of IHT legislation announced

 

As far as IHT and estate planning are concerned, this was a fairly uneventful Budget.  The only real point of note is the inclusion of a tax rate reduction for charity donations.  The basic rules remain unchanged, with no mention of the proposed legislation review by the Office of Tax Simplification (OTS).

Please read on for the IHT headlines in more detail…

Charity donations
From 6 April 2012, the IHT standard death rate will be reduced from 40% to 36% when 10% or more of the net estate value is left to a registered charity.  The saving will increase the charitable donations and will not increase the amount received by any beneficiary. We note that this change and the calculations to be used are currently open to individual interpretation, and look forward to further clarification when the legislation is passed later this year.

Basic rules
The nil rate band is still frozen until 2014/15, but will then increase in line with CPI each following year. The DOTAS (Disclosure of Tax Avoidance Schemes) regime will be extended to include IHT planning via trusts from 6 April this year.  The regime will not apply to the WAY’s current range of IHT mitigation plans, but would affect any new trust based plans that we introduce.  We will of course provide as much information and assistance as we can when introducing any new plans that are subject to the DOTAS regime.

OTS review
Some expected an announcement regarding the Office of Tax Simplification (OTS)’s proposal that there should be a top down review of Inheritance Tax as a whole.  This was not forthcoming in this Budget, but may still be announced at some point in the future.  We believe that any changes would likely be made with the aim of raising more tax – the driver for change more practical than ideological.  We will of course keep an eye on this proposal and inform you of any effect this would have on the WAY range and your clients’ investments.

WAY has taken great care to ensure that our IHT mitigation plans are, and will remain, effective.  We liaise with HMRC on all new plans, concepts and subsequent changes in relevant legislation to make certain that our plans are still innovative and, above all, useful in the current financial environment.

Mark Benson, TEP CertPFS,
Technical Manager, WAY Investment Services Limited
28th March 2011
www.waygroup.co.uk

Posted on 28th March, 2011 | Tags: Basic Rules, Budget 2011, Charity Donations, Financial Planning, IHT, IHT Mitigation, Legislation |
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WAY IFA seminars to focus on IHT

The WAY Group is hosting a series of seminars designed to help IFAs get to grips with new legislation on tax planning.

The group will visit eight regions across the UK for the inheritance tax multimedia seminars in November.

A senior team from WAY will talk about current legislation, the frozen nil-rate band, disclosure of tax avoidance schemes regime and the direct impact on advisers and their clients.

The seminars will also aim to help IFA develop the service they offer clients.

Eddie O’Gorman, Sales & Marketing Director of WAY, said: “Many IFAs are unaware there are a number of innovative investment strategies available to them.

“It is vital to use the correct trust and not simply for estate planning and family wealth preservation. In these days of punitive taxation, where the government is looking to maximise revenue from all areas, the use of tax-efficient solutions is likely to be more in demand than ever.

“IHT and wider estate planning and the myriad of extended family taxation issues that accompany this area of overall financial planning can be a minefield. WAY is a known specialist and pioneer in this area and we will be bringing our expertise to regional financial advisers to enable them to draw on our extensive experience and successes in high-level estate planning.”

Visitors will also be provided with case studies and marketing material during the eight-day whistle-stop tour, which opens in Ashford, Kent, on 5 November and ends three weeks later in Truro, Cornwall, on 25 November.

Log on to: IFA Seminars – Autumn 2010 for more information.

Paul Wilcox,
Chairman & Technical Director, WAY Group
5th November 2010

Posted on 5th November, 2010 | Tags: IHT Mitigation |
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Homer says ‘Doh’ to DOTAS

The recent announcement that IHT mitigation via transfers into trust is likely, in future, to be included in the DOTAS (Disclosure of Tax Avoidance Schemes) regime was received with some trepidation by advisers accustomed to assisting their clients with IHT mitigation.  In reality this proposal by the Treasury and HMRC is nothing more than was expected following the blocking in the Finance Act 2010 of two specific trust schemes which dramatically (and arguably artificially) reduced the value of assets gifted into trust.

Now that the coalition has nailed its IHT colours to the mast by freezing the Nil Rate Band (NRB) for 5 years it is backing this, much harsher than heralded, approach with supporting legislation to plug as many leaks as possible.  The consultation document introducing the DOTAS requirement does not seem unreasonable in the circumstances and certainly does not impact on most conventional IHT mitigation work using the various trust schemes which are widely available.  What is being suggested as far as disclosure is concerned?

The new rules will not require any existing schemes well known to HMRC (such as flexible and discounted gift schemes) to register because they are being ‘grandfathered’ in to acceptability.  Looking forward it will only be new trust schemes which (a) involve chargeable transfers beyond the donor’s current allowances, including any unused NRB – in other words where property becomes ‘relevant property’ – AND, (b) which involve an ‘advantage’ in relation to the IHT entry charge – an advantage being defined as the avoidance, reduction or deferral of a charge – which have to be registered.

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 the current crop of trust-based mitigation arrangements.  The proposals are 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 that all existing plans of which HMRC are aware – and future plans which adopt the same principles as existing plans – will be quite safe.  In fact 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 going forwards?  Well we should start by considering the position of taxpayers who have been relying on either the indexation of the NRB or, more recently, the Tory commitment to a transferrable £1m NRB, to lift them out of potential liability.  I think this is bad news for such optimists.  It is clear that a Lib-Con coalition government has a rather less generous approach to inherited wealth than that promised by the Tories.  Freezing the NRB for 5 years when the knock-on impact of ‘quantitative easing’ (printing money) is likely to be rampant inflation down the line is really quite serious.  I think most readers will agree that 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 well continue through until another term of government – especially if next year’s referendum delivers backing for the Alternative Vote electoral model.  This will mean a continuation of a cautious approach to raising IHT allowances.

The following chart shows the value of the NRB compared with assets starting at the same value rising with inflation.

This means that taxpayers currently on the cusp of a potential IHT liability will be severely disadvantaged by the freezing of the NRB – assuming inflation of 4% over the next 2 years followed by 8% for 3 years.  Readers may doubt such a scenario but not if they are German historians!  In the situation shown, a potential liability of nil at the beginning would become a liability of some 40% of £117,814 (tax of £47k+) after 5 years, simply resulting from inflation.

This brings me on to a favourite phrase of my IHT planning friend, Nick Chadwick, who constantly reminds taxpayers to ‘hope for the best but plan for the worst’.  This has served him well over several decades of capital tax planning and, I suspect, he will be proven right yet again!

So the message here is that all those advisers and their clients who, since 2008 when they were given false hope by the posturing of Alistair Darling and George Osborne, have put off their IHT mitigation planning, have no time to lose.  Since many of these people are relying on multiple use of the NRB, every day is important in clocking up those 7 year inter vivos periods.  Remember – hope for the best but plan for the worst – start your IHT mitigation planning today.

Paul Wilcox,
Chairman & Technical Director, WAY Group
9th August 2010

Posted on 9th August, 2010 | Tags: HMRC, IHT Mitigation, Nil Rate Band |
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Going for gold – 5 reasons to consider

The top performing asset class of the last decade was gold. Only toward the end of that period did ‘ordinary’ investors take advantage however, as routes to the market opened up. Now we see TV adverts every day looking for scrap gold and Harrods selling gold bullion, so is this a precursor for a classic asset ‘bubble’ prick? WAY do not believe so and here are five reasons why…

From January 2000 to December 2010 the return on gold was 277%, outstripping all conventional asset classes. Though a number of technical analysis readings suggest that the bull market will continue for a ‘second wave’, there is concern that the increasing populist aspect of the asset is indicative of a market that has run its course.

The latter is an understandable emotional response given what has been seen of some other asset and thematic cycles in recent times but the relative comparisons are difficult to match up. Consider the following:-

• GOLD AS MONEY

For centuries gold has stood as a proxy for or alternative to cash and its value has been historically reflective of that position. That descriptive changed in the 1980′s through 1990′s as disinflation became the universal goal and the returns from equities and financial assets were robust. Essentially, gold was re-classified in investment terms as a pure commodity. During this period gold fell from $850 per ounce in January 1980 to $252 in July 1999, a true bear market.

We now stand at a point where quantitative easing has been deployed by the major economies to the extent that the USA have printed more money in the last 15 months than they had run off since 1984 to that starting point. The global risk must become universal inflation of an accelerated kind and devalued paper money.

Gold’s re-rating in investors eyes as a cash alternative looks highly probable with such a backdrop, providing true support to price valuations. However probable, let’s not just assume inflation will be rife just because it supports the gold argument. Some economists are starting to forecast Japanese style deflation for the UK stating a moribund economy combined with stagnant credit conditions. Indeed there is substantial anecdotal evidence that for the first time in living memory that UK consumers are paying back debt. Here the Japanese experience is especially valuable, Japan as everyone knows has suffered the conditions described for the last decade during which time the Yen price of Gold has risen by 300%.

This is fairly conclusive evidence that Gold can also prosper in deflationary conditions as well. Furthermore a weak UK economy will tend to produce a weak sterling exchange rate (indeed it this trend has already started) and Gold & Gold assets offer UK investors a perfect currency hedge that comes without paying fancy fees associated with many structured products that attempt to offer protection against the likely decline of the pound.

• GOLD DEMAND

In recent times the supply and demand equation has been relatively simple and broadly equal. The tonnage of mined gold can be pair matched with fabrication demand, e.g. jewellery, dentistry, etc. Whilst additional supply from merchant bank and scrap gold sales has matched investment demand. The latter is increasing however, with China in particular swallowing up gold in preference to US treasury bonds. This looks certain to continue as the economy of the former continues to grow and, due to reasons mentioned earlier, the latter seem unlikely to prove attractive for some time yet.

• GOLD SUPPLY

Whilst demand grows it is unlikely that supply has the capacity to increase in line. South African fields are now 90% exhausted with, as example, the largest gold field ever discovered, Witwatersrand, now producing about 230 tonnes a year (10% of world production) down from its peak of 1,000 tonnes in 1970. Canada, US and Australia have further potential but this cannot be turned on ‘like a tap’. Additional prime to supply as in the 1980′s and 1990′s by the Western governments and banks selling off gold reserves has all but finished. The auction of half the UK’s reserves at 10% from the nadir in price – ‘Brown’s Bottom’ – being amongst the most unfortunate of disposals. So, growing demand and a supply mechanism struggling to keep pace should continue to underpin gold’s future prospects.

• GOLD, INFLATION ADJUSTED

There is twitchiness in the market about the current gold price despite the positive fundamentals. To a degree this is spawned by the wariness of commentators new to this asset class and more familiar with financial, particularly equity, markets. The $1000 threshold has been crossed and this is perceived as a neat high tide mark. However, at the peak of the previous bull phase in January 1980, gold was priced at $850 per ounce. Using the most conservative measure of US inflation the equivalent today would see gold trading at $2,300. With the current price not quite half of that figure it is easy to see why supporters eschew the notion that we are in a bubble. Rather, this is further evidence of the potential.

• RELATIVE POSITION TO OIL AND DOW JONES

To check the relative validity of the gold price it is helpful to check against other key measures. Another key commodity, oil, has had its own bull run, paused for breath, and is now moving upward again but the gold price is still sitting below its 40 year ratio of 15.1 relative to the ‘black gold’. It remains in the zone where arbitragers would be shorting oil and going long on gold. The current DOW/Gold ratio sits at 9.29. An 80 year check against the respective indices shows Gold peaking when within a 1-5 ratio of the equity index. With the DOW currently at 10,000+, this would indicate a target of $5000 per ounce! These relative comparisons are, of course, moving feasts but are a useful sanity check on the prevailing price.

For the ‘ordinary investor’ gold has seemed a little remote but the routes to investment have increased in recent years through additional fund offerings and ETFs. Inexperience will bring caution and perhaps fear that the gold race has already been run. However, with equity markets and bond markets having a far from certain near future, there does seem to be a strong case to further diversify investor portfolios and place a proportion in gold at this very juncture.

Eddie O’Gorman
WAY UK Head of Sales & Marketing
12th March 2010.

Posted on 12th March, 2010 | Tags: Gold |
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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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