“No taxation without respiration” is a rallying cry of the Republican Party in the US.
There is no doubt that talking about Inheritance Tax (IHT) invariably invokes an emotional response. It is a tax on the transfer of wealth to future generations, which is invasive and comes at the worst time in a person’s life.
For all of the air time and press coverage IHT receives, it actually contributes very little to government coffers. It is estimated 5 per cent of deaths in the tax year just ended will give rise to an IHT liability – roughly 30,000 estates. The government receives about £5bn from IHT revenues each year, less than 1 per cent of total revenue, although this is expected to increase by £1.5bn in the next five years with rising prices for property and equity.
This has led to calls for IHT to be scrapped completely and replaced with various alternatives, including immediate taxes on recipients of lifetime gifts and increased taxation for pensioners.
Most recently, Chancellor Philip Hammond announced plans to raise probate fees by introducing a tiered system that, at the top end, will result in a fee of £20,000 for those with estates worth more than £2m.
The argument over whether the wealthiest in society should pay more is not really the point. One of the issues is that a client could have a relatively simple estate containing a main residence valued at £2m and little else in the way of liquid assets, but their executors might still be forced to pay £20,000. However, the executors of a smaller estate valued at less than £1m, which could be much more complicated to administer, will pay a fraction of this amount – £4,000.
So, the case for well-considered and effective IHT planning is as topical as ever.
Advisers are faced with a plethora of options, from simple life assurance to purchasing swathes of woodland, but the starting point has to be an accurate assessment of the client’s likely IHT liability.
Without a crystal ball, an IHT calculation can usually only be a snapshot in time. However, advisers are increasingly using cash flow planning software not only to project the future value of assets, but also to consider the affordability of lifetime gifts to individuals or charities and the capacity for IHT-efficient investment.
In my experience, using this balance-sheet approach with clients encourages constructive conversation about a topic few want to dwell on.
A range of commonly understood and used insurance-based products to help with IHT planning already exist. Arguably, the simplest is life assurance. The most straightforward is whole-of-life cover, ordinarily on a joint-life, second-death basis. Premiums, usually qualifying as normal expenditure out of income, are effectively an advance to the nominated beneficiaries. The compound returns on those premiums are often attractive and relatively risk free.
Discounted gift trusts and gift-and-loan trusts are tried, tested and effective planning tools. At the other end of the spectrum are more esoteric schemes, such as investing directly in forestry and woodland which, in addition to IHT relief, can also confer income tax and capital gains tax benefits. Not surprisingly these are relatively long-term investments and tend to be suitable for those with sufficient investment experience and investable assets.
