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Keeping in step with the latest tax schemes
Maureen McComb Inheritance Tax Specialist
Inheritance tax seems to be in the press every weekend, with journalists writing
endless stories about the impact that tax could have on your estate.
Unfortunately, many articles are sensationalised and this can lead to confusion about
the opportunities that are available to mitigate inheritance tax and, more
importantly, those that are no longer effective.
The most significant development in recent years relates to the tax treatment of so-called
‘pre-owned assets’. The HM Revenue and Customs has introduced an income tax charge
on people who have entered into arrangements to dispose of assets, such as the family
home, to mitigate inheritance tax while retaining use of them. It is estimated that the preowned assets tax, often referred to as POAT, could affect up to 20,000 homeowners in the
UK. It has also become apparent that there will be situations whereby ‘innocent’ families
will be caught by the income tax charge.
The scope of this new tax is wide, and the regime took effect from 6th April 2005. This is
a complex area and, if you have gifted assets while continuing to use them, it is essential
that you contact your existing advisor or us to review your affairs.
With so much uncertainty over the scope of POAT, there have been many reports linking
the long-established Gift & Loan Scheme and Discounted Gift Plan to this new charge.
The Gift & Loan Scheme allows the person creating the trust (the settlor) to make a gift,
which will usually be exempt from inheritance tax, as well as a loan to a trust that will be
invested in a bond. The flexibility offered by this scheme allows the settlor access to the
loan element, which can be taken immediately as ‘income’, or delayed until the funds are
required. As the settlor is only entitled to the outstanding loan, all investment growth
within the trust is outside of their taxable estate.
The Discounted Gift Plan allows the settlor to make an investment into a trust, receive a
fixed ‘income’ for the rest of their life, and, subject to eligibility, receive an immediate
discount (reduction) in their taxable estate.
Both of these popular inheritance tax arrangements are available from The Ellis McComb
Partnership Ltd, and the Inland Revenue has confirmed that they will not fall within the
POAT charge.
With the above arrangements outside the scope of POAT, it is important to consider other
opportunities that can mitigate your estate’s exposure to tax. Tax-efficient Wills can save
up to £110,000 in inheritance tax, and creating a tax-efficient legacy with life assurance
can allow you to provide for your beneficiaries. You should also consider holding
investments that are exempt from inheritance tax after two years of ownership, such as a
portfolio of enterprise investment schemes.
All of these opportunities are available to clients of The Ellis McComb Partnership Ltd.
We can guide you through the full range of options, with our Approach to trust and estate
planning brochure.
With the actions already taken by HM Revenue and Customs, and further changes no doubt
on the way, there has never been a better time to review your planning needs and stay one
step ahead of the taxman.
The trials of being a trustee
How many people would volunteer to become a trustee if they knew there was a real
possibility they might, as a reward for their efforts, have to pay for the privilege?
Many trustees, both professional and lay, unwittingly run the risk of being sued for
negligence on an almost daily basis. One of the key areas where trustees fall foul is the
need to seek professional investment advice, which was enshrined in the Trustee Act 2000.
This article looks at some of the issues facing trustees as they seek to generate investment
returns.
There has to be a balance between risk, the costs of administering the assets and potential
investment return. It will usually be appropriate, especially for larger trusts, to have a
spread of investments including deposits, equities and property.
The challenge for many trustees who would like to invest in property is one of scale.
Clearly only the largest trusts will be able to invest directly in property but are then faced
with all the costs of managing it. Most trustees will pass these responsibilities onto a
managing agent. Perhaps more important is the question of spread – not having all your
investment eggs in one property basket.
The picture is, of course, very different with equities. It is relatively easy to get a good
professionally managed fund, such as a unit trust. Investing directly will incur the costs of
buying and selling shares, maintaining records (of dividends received, for instance),
completing the special tax return for trusts, paying the dividends on to the appropriate
beneficiaries, and so on. All this can result in additional professional fees.
Most UK-based trusts are now taxed at an extra rate of 32.5% on all dividends received.
Investing in pooled funds will also incur charges. Many trustees will see these as well
worth paying so that funds are managed by full-time investment professionals whose sole
function is to maximise returns to their clients within strict criteria, along with the
reduction in administration expenses this bring.
A unit trust will typically invest in 100 or more shares, bringing diversification and spread
of risk. Also, the trustees will receive just two income distributions instead of, say, 200.
Alternatively, the trust can invest directly via a portfolio management service, typically run
by stockbroking firms. This may appeal if a trust already owns individual shares but is
seeking improved professional management.
Of course, unit trusts and stockbroker portfolios are not the only investments worthy of
consideration. There is a third option – the investment bond. This has particular
advantages as a trustee investment. Investment bonds are essentially life insurance policies
and, as such, area treated as non-income producing assets by HM Revenue and Customs.
Any income the life assurance company receives is deemed to have been received by the
fund and not by the individual investor.
This has two advantages. First, there is no additional tax for the trustees to pay, resulting
in better compound returns; and, second, the trust should incur no accountancy costs nor, in
many cases, trustee costs.
If the trustees decide to change the underlying funds within their investment bond,
switching funds is not regarded as a taxable event for capital gains tax purposes. The Ellis
McComb Partnership Ltd can give more details and advice on this important area.
Maureen McComb
The Ellis McComb Partnership Ltd
3 Mortimer Street
Birkenhead
Wirral
CH41 5EU
Tel:
Fax:
Email:
Web:
0151 650 6520
0151 650 6525
ellis.mccomb@sjpp.co.uk
www.sjp.co.uk/ellismccomb