Nothing is forever
Benjamin Franklin in 1789 famously said that ‘the only certainties in life are death and taxes’. More recently the raconteur Will Rogers suggested ‘the only difference between death and taxes is that death doesn’t get worse every time congress meets’. Given the COVID-induced debt we see almost everywhere in the world today, this latter is most certainly true, and those of us with UK domicile clients will be interested in Rishi Sunak’s next budget.
If you’re familiar with Churchill’s view on this subject – “For a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle” – I fear his perspective has long since been forgotten.
So, what’s currently under the microscope, why, and what can be done?
Well, in recognition of the complexity of the UK tax code, David Cameron in 2010 established the Office of Tax Simplification (OTS), now an independent office of Her Majesty’s Treasury (HMT). It was set up to advise the Government on simplifying the UK tax system. In 2015, examining all variants of UK personal taxation, inheritance tax (IHT) ranked third out of 107 areas for ‘underlying complexity’, and the OTS subsequently offered reports dedicated to IHT for Government in 2018 and 2019.
The good news is, with almost 90 reliefs and exemptions, there are invariably things you can do for your clients for IHT under today’s legislation. The bad news is many consider this very likely to change.
Assuming legislative change doesn’t thwart us too soon, here are three of my favourite mainstream ideas, that clients might not be aware of, without your help.
1) The ‘re-useable’ nil rate band
I’m sure some would recognise the nil rate band (NRB), transferrable NRB, residence NRB and transferrable residence NRB, but how about the notion of the reusable NRB? The residence NRB is only useable on death, as is the transferrable NRB, although only on the second death (for married couple or civil partners). However, the straightforward NRB can be used during the lifetime, as well as on death. A transfer to a trust or outright gift (chargeable lifetime transfers and potentially exempt transfers) normally fall out of account after seven years, freeing up the NRB that they represent up until that time, meaning after that time, the NRB can be used again, in lifetime or upon death. This means that someone in their 50s, of good health, could reasonably expect to use the NRB at least five times, in today’s term removing £1.625 million plus from their estate, not to mention the residence NRB. As well as this, making lifetime gifts could also keep the estate below the important £2 million threshold, meaning the residential NRB isn’t tapered away, and the growth on those gifts is outside of the estate of the donor too!
2) Normal Expenditure out of income
This is a valuable exemption which is often overlooked when considering IHT and is immediately efficient. There is no seven-year clock associated with a potentially exempt transfer nor is it a chargeable lifetime transfer.
This applies where taking one year with another, it can be shown that gifts:
- form part of the donor’s usual expenditure
- are made out of true income, and
- leave the donor with sufficient income to maintain their normal standard of living
And given that the expenditure can be applied to a trust and invested, control over who and when they benefit is also available.
3) Asset freezing
Whilst this might sound like a schoolchild’s experiment, in financial planning terms this can refer to planning to prevent growth on the estate from increasing ones’ exposure to IHT. Whilst clients will often baulk at giving something away, and foregoing future access, they are often more amenable to retaining control and access to what they have now but giving the growth away in a controlled manner
To consider how effective this strategy might be, it’s worth contemplating possible growth rates and life expectancy. For example, a British born male, standard health for his age, at 55 might have a 30-year life expectancy. If the premium was £500k, and the growth was annualized at 5% net of charges, at the date of death, more than 75% of the plan value would free from IHT, and an even greater proportion if withdrawals had been made.
Time to review, is now
If a client has a will, no doubt they would prefer that more, not less, ends up with their loved ones. And given the absence of the 2020 Autumn Budget, a Spring variant is even more likely.
To find out more about inheritance tax and how effective planning could benefit your clients, visit Quilter International’s Technical Centre.
The information provided in this article is not intended to offer advice and is for financial advisers only.
It is based on Quilter International’s interpretation of the relevant law and is correct at the date this article was published. While we believe this interpretation to be correct, we cannot guarantee it. We cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this blog. The examples used in this article are entirely fictional and used for illustrative purposes only.
