Protection in estate planning
There’s a really interesting juxtaposition between the amount of money that inheritance tax generates for the Treasury and ascertained public feeling about the tax.
The latest HMRC “receipts” stats show that IHT yielded £5.384 billion in the 12 months to July 2019 [1]. This makes IHT one of the lowest yielding of personal direct taxes [2]. The Office for Budget Responsibility (OBR) anticipate that IHT will raise £5.3 billion in 2019–2020. This would suggest that for every £100 raised in taxation only 77p comes from IHT — less than 1% of the total tax yield. And fewer than 25,000 estates are liable to IHT — less than 5% of all deaths [3].
But… but….
A YouGov survey in 2015 revealed that inheritance tax was “the most unfair” of 11 taxes by the people surveyed [4]. And it’s this fact (the perception of unfairness) that is most important. As all advisers will know, a “motivated” client is one that is more likely to engage in acting to secure an outcome that will improve their financial wellbeing or that of their loved ones. Add to that the fact that a high proportion of the overall IHT generated comes from estates over £2m (remember the residence nil rate band starts to be tapered away once the value of an estate exceeds this threshold) and that many of these estate owners will be or could be clients of financial advisers. This is based on the simple premise that, generally speaking, the more you own and the greater the IHT challenge, the more likely you are to: (1) seek out advice and (2) be in a position to pay for it.
Regardless of the aforementioned statistics (and they are very interesting, aren’t they?) Inheritance tax is a subject that interests many of your clients. There has also been a lot in the news over the past year or so relating to the subject of inheritance tax and estate planning. The Resolution Foundation report “Passing On” [5] and the (Labour Party commissioned) George Monbiot produced paper “Land for the Many” [6] incorporate a recommendation that IHT is radically altered to a receipts basis where lifetime gifts and the final transfer on death are taxed on the recipient. Many of the known reliefs and exemptions would also likely be swept away if such a radical reform were ever implemented.
The Office of Tax Simplification (OTS) through two reports (the latest published this summer) have also proposed a raft of changes to the administration and operation of the tax — some quite radical, including removing the “14-year rule”, reducing “cumulation” from 7 years to 5 years and abolishing taper relief [7].
For all of this “news” not much has happened though. Government and Parliament have been somewhat consumed by another matter (Brexit of course) that has severely restricted the ability to concentrate on anything else it seems. That doesn’t mean there won’t ever be future changes though — there almost certainly will after the upcoming general election. IHT change is however unlikely to be top of the agenda for new legislation. And, whoever forms a government, IHT looks set to remain in substantially the same form that it is currently. Against this background, when thinking about estate planning (and inheritance tax reduction and provision as an intrinsic part of that) it remains essential, as for all tax planning, to build in a regular review to take account of changes in the law, best practice and your circumstances, assets and aspirations.
So where are we right now? Well, effective planning (at least that which is regularly talked and written about) usually incorporates a mix of lifetime giving and efficient will planning.
The trouble with lifetime giving, regardless of its super effectiveness (especially once the “survival period” of, currently, seven years has expired) is that the would-be donor often has concerns over retaining some element of control over and/or access to the funds or assets being given. That’s where trusts (and especially trusts of financial services products) come in. Most of you reading this will be familiar with loan trusts, discounted gift trusts and the many variations on those themes as a way of giving with retained control, via trustees and access, as a creditor or someone entitled to regular payments. These types of plans that have been used for some time now, are also not subject to the rigours of the Disclosure of Tax Avoidance Schemes (DOTAS) provisions. There’s also of course the range of investments that qualify for business relief removing their value from the investor’s taxable estate after two years ownership. This sort of lifetime planning works, broadly speaking, because it doesn’t offend the well-known Gifts with Reservation (GWR) and Pre-Owned Assets Tax (POAT) provisions.
So, what if you can’t or can’t fully remove your IHT bill through lifetime giving? Well there is, and always has been a brilliant solution. One that allows you to retain control over and access to the assets that you are unable or unwilling to give and delivers entirely permissible and non -confrontational benefit for your intended beneficiaries. What is it? A life assurance protection policy in trust for the beneficiaries who will inherit your estate. Now for most couples the liability to IHT will arise on the death of the second of them to die so a last survivor second death policy would be what is required. The premiums will be gifts but will almost certainly be exempt as normal expenditure out of income or if needed, within the £3,000 annual exemption. Remember, there is not a hard monetary limit on the normal and reasonable expenditure exemption. The premiums just have to have been paid regularly out of income with the payer’s standard of living not being adversely affected by the payment. The sum assured will be paid tax free and the settlor will (under a discretionary trust) have power to make a non- binding expression of wishes of who they would like to benefit. These can be easily changed from time to time as required. While the trustees are not formally bound by them, they would carry great weight.
Of course, health and age will have an impact on the premium level but subject to this — what could be simpler? The peace of mind that the liability is covered — without the need for any gifting, loss of control or access to funds. This can be especially beneficial in relation to assets where it is harder to give and avoid the GWR/POAT provisions — e.g. residential property.
A serious consideration of lifetime gifting should of course always be undertaken as a first step — especially where there are cash and investments but too often it seems the powerful role that appropriate life cover in trust can play is overlooked. Life cover in trust, under the current rules, can also be an important and effective way of providing for the potential IHT liability on a gift and/or the resulting increase in the liability on death for the 7 years following the lifetime gift.
To close then, our point is not to forget, when estate planning, the very real, often very economic and always extremely powerful role that appropriate life assurance in trust can play.
Tony Wickenden, Managing Director, Technical Connection
Please note, the views and opinions expressed in this article are the view and opinions of the author and do not necessarily reflect those of Aviva.
PT151009 12/2019
Sources:
1. Gov.uk, Inheritance tax: analysis of receipts, September 2019. Contains public sector information licensed under the Open Government Licence v3.0
2. Gov.uk, HMRC Tax and NIC receipts, Released September 2019. Contains public sector information licensed under the Open Government Licence v3.0
3. Office for Budget Responsibility, Inheritance tax, Tax by tax, spend by spend.
4. YouGov, Voters in all parties think inheritance tax unfair, March 2015. Of 11 taxes, people surveyed considered inheritance tax to be the most unfair.
5. The Resolution Foundation, The Intergenerational Commission’s report ‘Passing On’, May 2018
6. The ‘Land for the Many’, commissioned by the Labour Party.
7. The Office of Tax Simplification, Inheritance Tax Review — second report: Simplifying the design of Inheritance Tax, July 2019. Contains public sector information licensed under the Open Government Licence v3.0
