March 2008

IHT mitigation issues

Dear Editor,

It is important that advisers are aware of the potential price their inheritance tax clients may have to pay for traditional discounted gift schemes. Of course the taxpayer can remove some of his assets beyond the reach of the tax man by gifting them into trust and, yes, he can retain a lifetime 'income' from those gifted assets. The potential problem, however, is the complete lack of flexibility should the taxpayer's circumstances, or that of his family, change. During the lifetime of the donor a traditional discounted gift scheme offers no access to the trust funds whatsoever beyond the annual 'income' payable to the donor.

We all know that the discount on such a gift is extremely useful if the taxpayer were to die within the first seven years, but with increasing longevity this is becoming far less important than the ongoing financial security and flexibility of the taxpayer. Forecast life expectancies indicate that a 70 year old has something approaching a 90% chance of surviving the necessary seven years for gifts to fall out of account without charge. The average person of this age is far more concerned about facing an uncertain financial future than necessarily in securing a discount.

I have always favoured the use of flexible plans, where annual drawings are variable and assets can be appointed or lent to beneficiaries. These can, where necessary, be combined with a small amount of seven year term assurance in trust to cover any premature tax.

It is no longer justifiable for advisers to sell discounted gift schemes on the basis of their simplicity and lack of necessary maintenance. With taxpayers' circumstances increasingly likely to require ongoing flexibility - I am convinced that TCF must be foremost in advisers' minds. Tax planners should 'step up' and accept this challenge.

Paul Wilcox
Chairman and Technical Director
WAY Group