Tory IHT promise likely to lead to planning complacency

Inheritance Tax planning specialist and wealth manager WAY Fund Managers Ltd has issued a red alert to households believing they will escape IHT in the event of a Tory government raising the IHT threshold to £2m.

Homeowners are also in danger of complacency given the sharp fall in property values, warned WAY, which is responsible for devising the most flexible range of IHT planning tools and solutions in the UK.

“Shadow chancellor George Osborne has been compromised into a pre-election confirmation of the Tories’ autumn 2007 pledge to effectively raise the threshold for IHT to £2 million – by allowing couples to transfer a spouse's £1 million allowance on their death to the surviving partner – which could prove to be a disastrous illusion for families thinking they will be protected from this widely loathed tax,” said WAY chairman and technical director Paul Wilcox.

“To push IHT planning to one side on the back of what is effectively a tenuous election promise – which is the likely result of this announcement for many taxpayers - is extremely dangerous,” he warned.

“While a £2m threshold would liberate many homes from the spectre of the 40 per cent tax, the reality is that Osborne has yet to nail his colours to the mast and unveil a coherent plan as to how he would achieve this solution. It is easy to talk the talk. Implementing a proper fiscal strategy is another matter.

Wilcox also warned that there is a double danger at work right now.

“Many homeowners up and down the UK will be thinking that the current slide in property values will shield them from IHT.

“Mortgages are difficult to come by and property prices are consequently falling, but underlying demand continues to grow. With builders laying off their workforces and Government targets for new housing falling drastically behind schedule in both public and private sectors, a further surge in house prices is virtually guaranteed. So whilst the IHT threshold might rise, property values are not going to be far behind, with a recovery coming perhaps as early as 2011,” said Wilcox.

Most of the voting public now assumes the Tories will come to power – if not next year, then in 2010.

“But opposition parties always talk up their manifesto in order to win votes,” said Wilcox.

“In the absence of a coherent IHT strategy, our view is that the Tories will initially increase the individual Nil Rate Band to £0.5m so that there is a joint allowance of £1m. But even this increase assumes that they can cope with the financial consequences, which is far from a certainty bearing in mind deteriorating government finances.

“Wealthy people should move assets out of their estates as soon as possible to start the 7 year clock ticking, using sophisticated trust style planning where they can retain access to those assets in the future should this be necessary,” he said.

“This is particularly true at present when financial assets can be transferred at market-depressed prices thereby enhancing the impact of the planning so that recovery occurs outside of their estates.

“Since capital gains are now taxed at 18% compared with higher rate income taxpayers’ 40%, we recommend flexible trust structures, using direct investments such as collectives. Truly flexible structures mean that they can be re-thought in later years should the donor require extra funds, or if the need for IHT mitigation melts away,” added Wilcox.

WAY Fund Managers offers an extensive range of IHT mitigation solutions designed to deal with the majority of scenarios, from HNW individuals to those on more modest retirement incomes.

These are constantly reviewed to keep one step ahead of any changes to taxation laws that might adversely affect UK taxpayers, wherever they live.