Inheritance TaxApr 16 2020

Covid-19's impact on IHT planning

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Covid-19's impact on IHT planning

The looming deep recession is likely to mean lower asset prices, both in terms of property and stock market investments such as an Isa.

So how does this impact IHT planning?

Simon Harryman, investment director at Ingenious says it is too early to speculate about the extent to which the pandemic will impact the economy. 

While some asset prices could fall lower we cannot assume that all will behave the same Simon Harryman, Ingenious

“It will recover, but the speed and timing will depend on many factors, such as the length of ‘lock-down’ and how companies and consumers react when social distancing measures are relaxed or removed,” Mr Harryman adds. 

“While some asset prices could fall lower we cannot assume that all will behave the same.

For instance, in the UK there is a structural deficit in housing supply, which will remain, and so any reduction in house prices is likely to be less severe or sustained than perhaps commercial property where demand for retail and office units could be hit. 

“Of course, it is residential property that makes up a significant part of many estates and many will remain well above the nil rate band so demand for IHT planning should remain strong. 

“The financing of real estate development is a core trading strategy within our estate planning service generating consistent yields for investors. All lending is secured by a first charge and with average loan to value of around 67 per cent, there is a substantial cushion in the event of any reduction in asset values.”

Gifting one's assets

But with reduced asset values, gifting now may be an efficient way to pass on these assets so that the beneficiary can enjoy the asset growth before we move out of a bear market, while the original gift will have been made during a period of depressed values.  

Eamonn Daly partner at law firm Wright Hassall explains in a note that when a person gives assets away to other individuals and does not survive for seven years, the value at the date of gift is used to calculate the inheritance tax (IHT) due.

At the time the gift is made, any gain in value from when the assets were acquired is potentially subject to capital gains tax (CGT).

If asset values are lower than they were before the pandemic, the possible IHT charge if the donor dies within seven years of the gift will be less. With the level of gain reduced there will also be a smaller possible CGT charge.

Any future recovery in values will not affect the donor’s tax position.

The addition of the residence nil rate band which has provided an additional allowance since April 2017, is now £175,000.

For many people who have property and assets within certain limits, including the nil rate band of £325,000, this could provide a total IHT allowance of £1m for a married couple.

Jason Street, senior wealth management consultant at Mattioli Woods says: “If asset values do fall then the amount of IHT payable will of course reduce. 

“The challenge for government in the current season of support for many different areas of the economy is the ultimate cost of doing so and how it will pay for this over the years ahead. 

“The area of tax rates and allowances will no doubt come into focus once again and it may be that the more generous allowances provided in times of plenty could be reduced or removed.”

Mr Street recommends that having a flexible financial planning strategy in place will allow for the usual changes that inevitably come in terms of tax rates and investment markets. 

Family investment companies

Like trusts, family investment companies are another way to safeguard the family wealth from future generations using it unwisely or losing it through divorce or insolvency.

As Mr Daly further explains the family members may have no right to the assets or the income without the agreement of the trustees/directors. The person passing wealth can maintain control through being one of the trustees/directors.

With a FIC, gifts are made to the family shareholders and the tax rules on gifts to individuals set out above apply. 

For trusts, any value above £325,000 of assets which do not qualify for relief transferred in by one person within a seven-year period is subject to lifetime IHT. If the donor does not survive for seven years, the value of the gift is again used to calculate IHT on death.

Any lifetime tax paid can be used to offset the liability on death.

With values currently down, more assets could be transferred to a trust within the £325,000 limit than was the case just a few months ago.

Gains showing on assets transferred to a trust can be ‘held over’.

This means capital gains tax (CGT) is not payable by the donor.

Instead the trustees take the assets on as if they had acquired them at the donor’s cost. When the trustees dispose of the assets, the whole gain is chargeable to CGT. The trustees pay any tax due.

Mr Daly adds: "Lower gains now may be more palatable for a donor to take.

"If gains are not held over, the trustees‘ acquisition cost would be the value of the assets when transferred. The trustees could then have less tax to pay when they dispose of the assets."

Vulnerable clients

The coronavirus has inevitably made more people vulnerable to mental health, emotional and financial problems.

And the FCA may have put a delay to its guidance on vulnerable clients amid the coronavirus pandemic, but protecting the vulnerable remains uppermost in its mind.

For example, the FCA recently said it will develop a way of assessing whether firms are offering their clients "fair value" in a bid to protect consumers, particularly those who are vulnerable.

Advisers need to be in regular communication with their clients right now.

It has always been important to identify clients who might be considered vulnerable, particularly some of the elderly, those with mental or physical challenges and those that are going through big life changes, such as divorce or bereavement. 

At times of greater stress and in a crisis, the numbers of those who could fall into this category will naturally increase, and as advisers it is important to have a greater awareness of the issues clients face and whether they are more vulnerable in making certain decisions.

Mr Street says: “This could also include making big changes to wills or wider planning as a reaction to the current situation. 

“Our role would include asking the right questions to try to ensure that the changes are well considered and thought through and not just a reaction to pressure they are facing or a situation they are dealing with.”

Mr Harryman says: “The real bearing the crisis has had on the vulnerable, is that families are having to acknowledge vulnerabilities that lie among them and have conversations about what this means for them, that they had perhaps been putting off. 

“We think this raises an important question for the future. Will there, or even should there, be a shift in our willingness to make plans for more vulnerable times, be it the avoidance of social isolation, preparing for potential care needs or financial planning.”

Advisers need to be in regular communication with their clients right now.

It is at times like this they can demonstrate just how valuable good financial advice is. 

Mr Harryman adds: “We are first and foremost reminding our advisers to reassure clients that their money is under the stewardship of incredibly experienced investment professionals, who have navigated their investors through several market crises. 

“Subsequently, reviewing existing arrangements, discussing clients’ feelings and concerns and understanding what really matters to them is so important. 

“Now is the perfect time to include the wider family and an ideal opportunity to address the intergenerational wealth problem, about which, so much has been written. This will not only help the client and the family, but the adviser’s business too.”