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Tinkering with IHT but reprieve for deeds

This article is part of
Guide to Autumn Statement 2015

HM Treasury has stated it will continue to monitor the use of deeds of variation but there will be no immediate end to such schemes.

Rachael Griffin, financial planning expert at Old Mutual Wealth, says a deed of variation can be useful as it provides beneficiaries with the flexibility to pass inherited assets straight on to the next generation, so they essentially skip a generation.

She says passing assets on in this way means the assets escape being caught in the beneficiaries’ estate, preventing future inheritance tax concerns.

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Ms Griffin says: “The fact that the government will be monitoring this activity could make it vulnerable to change in the future.

“Therefore, when people are considering how best to pass assets on to all beneficiaries, it may be more effective to pass some assets on, to say grandchildren, during their lifetime, and the use of trusts in this type of planning can be a real advantage.”

Clarification was also included in the Autumn Statement that inheritance tax will not be payable on unused drawdown funds before death.

Claire Trott, head of pensions technical at Talbot & Muir, says it will be welcome clarity for some that may have been concerned that they would be hit in addition to possible tax charges on death post age 75.

Ms Trott says any clarity on inheritance tax and pensions is welcome because it has always been a grey area where people haven’t needed to draw their funds before they die.

“This will be more of an issue because members may be tempted to access other benefits due to the changes in death benefit options announced last year and brought into force in April.

“There is mention of a simplified test on dependants scheme pensions when they are payable, it is unclear at this point what test they are referring to, but it is hoped that it will bring scheme pensions into line with the options available at death on drawdown and annuities.”

Andy Bell, chief executive of AJ Bell, points out the legislation to ensure unused drawdown funds are not subject to inheritance tax on death is being backdated to 6 April 2011.

He notes this date was most likely selected because that was when flexible drawdown came in.

Mr Bell says: “That was the first point when someone had the realistic option of withdrawing all of their drawdown fund and so choosing not to do so could be treated as reducing the value of an estate on death.

“Clearly that is unlikely to be the motivation of not drawing down funds and so it is good to see the government confirm the IHT position.”

The Autumn Statement also forecast inheritance tax receipts of £5.6bn by 2020 to 2021 - an increase of 27 per cent on current levels.

Despite the introduction of the main residence nil-rate band, the effect of a frozen inheritance tax threshold of £325,000 from 2009 to 2010 to 2020 to 2021 is really beginning to bite.