Inheritance Tax  

IHT - What were you doing in 2009?

In fact, the RNRB could form the basis of your approach to your clients. With its introduction next April, it is worth checking what effect it will have on your clients’ potential IHT liability.

Any clients who are making plans to reduce or mitigate their IHT liability should keep accurate records of what they are gifting, and when, as this makes their executors’ job much easier once the clients are no longer here to answer questions.  The HMRC form – IHT403 – is required to be submitted by the executors showing gifts that were made during the seven years before death. Therefore, it makes sense for clients to complete this as and when they are making those gifts and, every seven years, they can start a new form.  That will ensure that whenever the client dies, the executors will have the previous seven years’ information available and no valuable exemptions will be lost.

What about the preferred order of gifting? Where someone is making different types of gifts over a period of time, there is a preferred order and, if the client dies within seven years, that order will impact on the amount of IHT payable on death. Getting the order correct could prevent an unnecessary increase in the value of any periodic charge on the 10th anniversary of any discretionary trust.  The correct order (in our opinion) is:

- use exemptions and reliefs

- gift and loan trusts

- discretionary trusts (chargeable lifetime transfers) 

- bare/absolute trusts or direct gifts (potentially exempt transfers).

It is therefore important to let your clients know that if, or when, they decide to start making gifts, they speak to you first so that you can keep them right as to which order to make those gifts.  Many well off clients will start off by making gifts to their adult children (£50,000 here, £100,000 there) and then decide they’d like to do something for their grandchildren. As the grandchildren are young and they don’t want to give them a lump sum just now, they will come to see you to talk about investing in a discretionary trust.

Unfortunately, they now have the wrong order for those gifts as the discretionary trust should be done before any direct gifts are made.

Of course, for clients who don’t want to physically give away their capital or assets, or perhaps have given away as much as they can afford but still have an IHT liability, don’t forget they can insure that liability (depending on age and health).  On this point, the important angle to remember is that the whole of life policy should be written under a suitable trust – otherwise the sum assured will be added to the client’s estate for IHT purposes and could increase that liability.