Aurora tax expert warns of IHT advice risk

Aurora tax expert warns of IHT advice risk

Penny Cook, the chartered tax adviser at Aurora Tax Services, has warned advisers to highlight the fact the residence nil-rate band is being phased in rather than all at once, or risk complaints further down the line.

In a keynote speech at FTAdviser’s Tax Efficient Investing conference, Ms Cook said one of the complications advisers currently faced with inheritance tax is the misconception around when the policy would come into force.

In reality, she pointed out that the residence nil-rate band will increase gradually over the next five years.

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In the 2015 Summer Budget, the government announced it would phase in a new residence nil-rate band from 6 April 2017.

It will start at £100,000 in 2017/2018, and rise to £125,000 in 2018/2019, £150,000 in 2019/2020, £175,000 in 2020/2021 and then increase in line with the Consumer Price Index from 2021 to 2022.

Ms Cook explained people may want protection against the liability they are exposed to as the nil-rate band gradually increases, by way of some sort of term assurance.

She said: “Clients see the headlines and think they are within the limit and won’t appreciate there will be this phasing in. There is an opportunity now to plan to reduce people’s estates by methods such as discounted gift schemes.”

When asked if there was a real risk of future claims to Fos if advisers failed to flag the need to temporarily reduce the risk of their client’s estate having to face an inheritance tax bill in the next few years, Ms Cook said: “I think it is something that has to be addressed with clients.

“If a client sees the headlines and thinks ‘my house is only worth £1.9m and I have some cash, we are within the £2m’, they will not as clients think there is this phasing in where they will have a liability.

“I think it is a very important point to bring to their attention. There must be a very simple fix for those people with some sort of term product.”

In his Budget, Chancellor George Osborne announced that he would “take the family home out of inheritance tax for all but the wealthiest”.

He did this by introducing a new transferable nil-rate band from April 2017, which will apply when a main residence is passed on death to direct descendants, such as a child or grandchild.

The inheritance tax nil-rate band – set at £325,000 – and the ability to transfer any unused main residence nil-rate band to a surviving spouse or civil partner, has allowed Mr Osborne to claim there will be an effective inheritance tax threshold of £1m in 2020/2021.

Steve Mufti, a chartered financial planner with Berkshire-based SM&A, said: “I am waiting to really understand what the rules are; the devil is always in the detail.

“I have had clients who have corresponded with HMRC about it. People like the idea of the IHT allowance, but you cannot get excited until you see the detail.”