Advisers warned 'don't be caught out' on IHT

Kevin Dean, CEO of AXA Wealth International, believes inheritance tax planning is still of utmost importance despite many believing it has become less of an issue.

Following the amendments to the transferable nil rate band legislation, many individuals now believe that inheritance tax planning is not something that they need to be concerned about. However, this is not the case and in fact, inheritance tax planning is still of paramount importance in many cases.

The misconception is primarily because the changes made in the Finance Act 2008, introducing the transferable nil rate band legislation, do not cover all possible situations. The changes do not apply to lifetime transfers and the ability to utilise this legislation is only available to married couples or civil partners on death. Couples who live together, even if they have children together, or family members living in the same property, are not covered by this legislation and will not therefore be covered.

Advisers should study the legislation and remember that individual cases will differ greatly, so make no assumptions. Individuals cannot rely on this legislation solving their IHT issues and should really look at the planning tools available such as discounted gift schemes and loan trusts, which can still be beneficial for many clients.

Market data now suggests that UK house prices are on the rise which means that, without any IHT changes, more and more people are going to require IHT planning again. Whilst some speculators are saying this current UK house price trend is a 'blip', there is no firm evidence of that at the moment, and this must be taken into consideration when planning.

Planning for inheritance tax puts control in the clients' hands. One of the issues which most people are unaware of, but that causes a great deal of distress, is that there is a significant amount of paperwork to complete on someone's death. This is especially true if the executors are looking to claim exemptions such as the transferable nil rate band. Looking though documents to find, information perhaps going back years, can be painful to undertake at a time of bereavement. Products such as the AXA Isle of Man Estate Planning Bond allow clients to take control of their tax planning during their lifetime rather than place the burden on the executors.

Some IHT exemptions are being adopted but care must be taken when considering these. The most talked about exemption today for IHT is the 'gifts out of income' exemption. This allows a person to make gifts free of IHT if they are made regularly and don't reduce the standard of living for the donor. HM Revenues & Customs has become very tuned in to this exemption in recent years and has been asking for significant proof before granting the exemption, proof which was not necessarily requested in the past. The difficult part is proving 'standard of living', which can mean so many things, as one person's standard of living is different to another. Again, this exemption also places heavy burdens on the executors who may need to hunt around for paperwork to prove the exemption can apply.

Finally, advisers should not rely on promises by opposition parties to abolish inheritance tax. Should the Conservatives come to power in the next election, it is unlikely that IHT will change significantly, not in the first couple of years at least. Originally, the Conservatives had suggested that the nil rate band would be increased to £1million, but it is doubtful that would be introduced given the Budget deficit they will be faced with. The Budget for UK IHT in 2008 was approximately £3 billion, so this would need to be replaced if it was removed.

Individuals should ensure that they seek the financial and legal advice required when looking at their IHT plans, making the most of the control they have during their lifetime to ensure their wishes are carried out.