Why minimising IHT is every adviser’s duty

IHT is a 'heinous tax' but can be reduced in many and varied ways, writes Paul Wilcox. A rumoured hike in probate fees is yet another tax on wealth...

The news channels are likely to be dominated with will we or won’t we get out of Europe in the coming months – and what better time for George Osborne’s tendency to hit ‘soft targets’ with his revenue raising efforts.

We have already seen a number of ‘stealth’ manoeuvres with pensions’ legislation and taxation for the better off – and now, who better to tax than the wealthy deceased?

They won’t complain after all because their voice has been silenced by the grim reaper. Thankfully, however, George’s efforts do not go unnoticed by those of us who are in the business of monitoring retirement legislation.

Surprise, surprise

With the EU referendum now dominating news stories, news of the late Cilla Black’s estate will have been missed by many.

Cilla, a very wealthy woman at the time of her death, left £15m to her three sons, who each inherited £3m. Something wrong with the sums there?

No, of course not – just George taking the lion’s share of her hard earned, highly taxed accumulated income as a 40% wealth, I mean, inheritance tax (IHT).

So George takes about £5m and the sons take £3m each – wow. Clearly Cilla missed out on the advice scene during her mature years.

However, I imagine that she probably had, at least, £100,000 a year of spare after-tax income in these recent years and if, as she could have, she had gifted that to her sons (even into trust to delay them spending it maybe) for ten years then the whole £1m would have escaped the IHT net.

What is the difference between that and her accumulating it herself and putting it somewhere safe for her kids, but knowing that it was available should she need it for medical or other care?

Not much difference as far as she was concerned. But being a bit careful about her own future cost her (kids) £400,000 in IHT!

So, the same after-tax savings, but put through a slightly different process, leads to a frighteningly different and arbitrary outcome.

‘Sneaky removal’

And to think that along the way and by stealth, George was levying 60% income tax on Cilla on her earnings between £100,000 and £120,000 because of the sneaky removal of the tax-free personal allowance.

So poor old Cilla paid 60% income tax on a chunk of her income which, having been carefully saved, was then taxed again at 40% because she had the audacity to be cautious and save her money for her kids. That really is random in my view.

Then we hear that there are plans afoot to increase probate fees for larger estates. (Cilla missed that one at least.)

The intention is to charge a massive £20,000 fee to lodge probate for estates beyond £2m.

One does not need to be a rocket scientist to realise that equates to a further unavoidable tax of up to 1% on death for large estates – those of the mainly prudent and hard-working elements of our population.

We are fortunate, however, because the justice minister has reassured us that no estate will have to pay more than 1% in probate fees – hurrah!

I have not seen any detail yet but they may also be playing the same trick as applies to the main residence nil rate band, which reduces by £1 for every £2 of estate value over £2m, disappearing altogether at £2.35m AND even counts fully exempt assets such as business and agricultural property in arriving at the value.

In all but name, this prospective probate fee must be considered yet another inheritance tax but in this case with no possible allowances to set off against it.

There are many and varied means of reducing this heinous tax, including AIM shares and ISAs, EIS schemes and various trust schemes.

It really is our obligation to spread the word about the various solutions to avoiding this unfair and randomly applied wealth tax. As Nike says – ‘Just Do It’.

Paul Wilcox is chairman at The WAY Group