We all know what constitutes a long time. In the case of a mayfly it’s a day, in politics it’s a week. But what about taxation? There doesn’t appear to be any common measure but let’s assume it’s one year. Twelve months ago when Gordon was still twitching the curtains at number 11 the market bulls were running, the property market was buoyant, and banks and building societies were promoting the importance of keeping the (inheritance) taxman at bay. Twelve months on even the most optimistic would be tested as far as the property market is concerned and the FTSE appears on a downward trend (any offers for over 6000 by the end of the year? Thought not). Inheritance tax (IHT) seems very much off the radar.

Although market sentiment has altered, has anything changed as far as IHT is concerned? Has the problem now disappeared? There was certainly a lot of comment after the Chancellor’s pre-Budget statement in Autumn which might have led one to believe that it had.

In the wake of the-election-that-never-was the change was, in some quarters, heralded as a doubling of the IHT threshold. It was of course nothing of the sort. It simply meant that married couples and those in civil partnerships could use the available IHT exemption which every individual has (then £300,000 – now £312,000) jointly. As a result it is now easier for them to effectively protect the first £624,000 of their wealth from the 40% rate of IHT. Many individuals had already made this tax saving through a certain amount of jiggery pokery in their Wills. The Chancellor’s announcement did away with this and was clearly a welcome simplification.

However the rise in affluence, buoyed by the property bubble, has meant that there are still a large number of individuals whose families could still have an IHT headache. Thankfully however there are now a range of innovative solutions available which might be deployed to reduce the burden.

In essence these either require you to give assets away to reduce the size of your taxable estate or to convert assets into those which do not attract IHT. Making significant capital gifts can achieve a meaningful reduction in potential IHT liability but can also mean the loss of access to capital and, perhaps more importantly, the income it produces. As no one can be certain how long they will live, or what their needs will be in later life, gifting can be a risky option. There are now however a number of investment solutions which go some way to resolving these issues.

Discounted Gift Trusts (DGT) are designed to allow people to cut IHT if they do not need access to capital but wish to retain a regular income. They involve the gift of capital to a trust, under which the investor retains the right to receive regular income for life. On the investor’s death, the trust fund is available for the benefit of their chosen beneficiaries. DGT’s attract immediate IHT benefits depending on the age of the investor and after seven years the whole of the investment falls outside of the investor’s estate for IHT purposes.

Cash, a standard equity portfolio and bricks and mortar attract IHT. However, certain investments become exempt from IHT after two years. These investments can be in AIM shares or in other smaller companies where you effectively become a small scale equity investor. Investment in farms and forestry - either directly or through investment funds - are also options. In some circumstances the value of the investment can be protected from market fluctuations.

Just because the exuberance may have gone out of the market doesn’t mean one should ignore IHT planning. Indeed it should increase the drive to ensure that what the market takes away isn’t compounded by the grab of the tax man.

If all else fails, you could of course just spend it!

Posted: May 2nd, 2008 under Trusts Wills and Estates.
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