With the nil rate band now remaining at £325,000 until April 2019, the added impetus to reduce the tax bill is being driven by thousands more estates facing the prospect of having to pay IHT as inflation and property prices rise.
The Conservative party had pledged to put up the threshold to £1m, but in the Autumn Statement, there was an announcement that it was being frozen until April 2015 and then increasing by 1% to £329,000.
The latest turnaround is designed to raise £1bn more tax to pay for the government’s funding of long-term care costs, as the 3% of UK households currently subject to IHT rises.
Gerry Brown, technical manager, at Prudential said: “It seems inevitable that many more families will find themselves drawn into the IHT net. The structure of IHT has remained virtually unchanged for many years. Can we now expect revenue raising restrictions to the current generous regime of exemptions and reliefs?”
Jeremy Pearson, technical support manager at Canada Life, offered a way of alleviating the IHT problem.
He said:”The answer could be to use the ‘Rysaffe principle’. This is a strategy that follows a precedent set in a court case – Inland Revenue v Rysaffe Trustee Company (CI) Ltd [2003].
It is a very simple strategy and involves not setting up one trust, but a series of trusts on separate days. Whilst this increases the paperwork and administration, that can be more than offset by tax savings."
Just like previous government changes to IHT, tax savings are still possible “it’s just that there is a little more work involved,” he added.
Pearson also highlighted those people who have done something about the IHT problem and, having set up discretionary trusts, they will find that there is more likelihood that those trusts will be worth more than the nil rate band on a ten-yearly anniversary. “This means that their trustees will have to pay 6% IHT on the excess amount.”
Brown also raised the prospect of further tinkering with the tax regime in this area: “It seems inevitable that many more families will find themselves drawn into the IHT net. The structure of IHT has remained virtually unchanged for many years. Can we now expect revenue raising restrictions to the current generous regime of exemptions and reliefs?”
While Christopher Groves, partner in law firm Withers’ wealth planning team, said: “While the purpose of the freeze may be to ensure that care for the elderly can be funded, the government may find that it has a perverse effect as individuals feel forced to give away funds that might otherwise have funded their care.”
