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It pays to plan

The introduction of transferable nil rate bands for married couples and civil partners may at first glance mitigate the need for inheritance tax planning. But this is not necessarily the case and ther

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The introduction of transferable nil rate bands for married couples and civil partners may at first glance mitigate the need for inheritance tax planning. But this is not necessarily the case and there is still an important role for intermediaries to play

It has been an interesting year for estate planners since the announcement of transferable nil rate bands on death for married couples and civil partners. This followed hot on the heels of the promise made by Shadow Treasurer George Osborne that a future Conservative administration will dramatically increase the nil rate band.

In light of these changes (actual and promised), questions have been raised about whether clients have a continuing need for inheritance tax (IHT) and estate planning advice. In fact, the need for advice, both in relation to will planning and lifetime provision, is now greater than ever.

Wills still essential
The introduction of transferable nil rate bands does not mean that couples no longer need to make wills. Reliance on the intestacy rules may not achieve the clients’ objectives. So clients should be advised to make a will and keep it up to date to ensure that their testamentary wishes will be fulfilled.

Despite some misunderstandings to the contrary, the introduction of transferable nil rate bands has not given couples any greater opportunity to save IHT than they could have achieved previously by using a discretionary will trust on the first death. Nevertheless, the change does make the process simpler and render the use of a trust unnecessary for many couples. But there are still numerous circumstances where the use of a nil rate band trust will be the most appropriate course to take.

In some circumstances where there have been multiple marriages, a combination of will trust arrangements and transferable nil rate bands will result in a total usable nil rate band in excess of the maximum allowable if only transferable nil rate bands are used.

What is clear is that clients will need help in relation to reviewing their own position and deciding on the most appropriate structuring of their will arrangements. If transferable nil rate bands are decided to be the most appropriate course, clients will need advice around the practicalities of making claims, the time scales involved and the records that will need to be kept.

Gift option
Moving on to the need for lifetime planning advice, in many ways the introduction of transferable nil rate bands should be an irrelevance assuming that even before 9 Oct, 2007 the first planning step was to ensure that use of a client’s nil rate band was maximised. Clients who are concerned about the impact of tax on what their heirs will receive still have the option to make gifts during lifetime to mitigate this.

While the current economic climate and depres­sed asset values will mean that, in the short term at least, IHT will be less of an issue for some, it also presents a window of opportunity for those who can afford to make gifts now to do so while values are low (particularly if there is potential for an increase in value of the assets gifted), as it is the value of the gift at the date it is made that determines any IHT liability.

Promises, promises
At their annual party conference last autumn, the Conservatives’ promise of an individual £1m nil rate band, which they subsequently confirmed will be transferable between spouses and civil partners, should give more of a pause for thought for those considering lifetime planning, particularly if such planning involves making irrevocable gifts.

It is by no means certain that there will be a change of Government at the next election, notwithstanding strong poll ratings for the Conservatives over the summer. There is also a lack of clarity over when, if ever, the IHT proposals would be implemented. Current economic conditions and a massive increase in Government borrowing do not appear to present the perfect opportunity for a tax cut. Will the plans be quietly shelved or, if implemented, will they be phased in over a period? At present no one can answer these questions.

Informed thinking
Clearly, these issues do need to be discussed with clients so that their views can inform the planning action that is taken. Some clients, particularly those older, wealthier individuals, with a desire to mitigate IHT will, no doubt, be happy to plan as normal, making outright gifts or using tried-and-tested methods such as discounted gift schemes to achieve an immediate tax reduction and some ongoing access to an ‘income’.

Other clients may feel comfortable with a more defensive approach that does not involve making irrevocable gifts. For these individuals, there are a number of viable planning options which include:

* Loan trusts (or gift and loan trusts): these may be particularly suitable for clients who are content in the short term to freeze their current IHT liability secure in the knowledge that they can access the capital used if the tax rules do change.
* A short-term life policy to cover the tax liability that may arise if the client wishes to delay planning until after the election.
* If the client has funds to devote to IHT planning and they wish to invest pending the outcome of the election, then they may want to consider a deferred discounted gift arrangement.
* If the client is prepared to take the investment risk, a portfolio of AIM shares, which attract 100% business property relief after they have been owned for two years, could also be an ideal answer.

Clients now, perhaps more than ever, need good advice on planning their estates. Recent events may have changed the emphasis of the advice required but they have certainly not removed the need to plan.

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