B A R B I C A N L I F E


Personal Finance Joe Coten puts more flesh on the bones on the subject of inheritance tax planning F


ollowing my previous article on inheritance tax (IHT) planning, I received a number of queries regarding the detail of how some of these schemes


work. The point that many found of interest was the idea of making a lifetime gift but at the same time having access to an income from the gifted sum. This is also known as having your cake and eating it. Gifts above the nil rate band (NRB) allowance, currently £325,000, by the way would attract the lifetime IHT charge of 20%, so this is normally avoided. One solution I barely touched on


last time round was the discounted gift trust (DGT). Technically this is called a carve-out trust, as the notional capital value of the set income is carved out from the value of the gift into trust. The way it works is that you pre-select the amount of required income and this is multiplied by your actuarial life expectancy. So if you are expected to live a further 15 years, for example, and the income from a £100,000 investment is £4,000 pa, then £60,000 immediately drops out of your estate. At 40% IHT charge this saves you £24,000 on day one. HMRC currently views the carved out sum as a right to income, in effect an annuity that dies with you. There are however one or two flies


in this particular ointment in that medical underwriting is required. So, if you are unwell or in more advanced years, this planning route becomes less feasible. In addition, the annual income returns to your estate, so if the money remains unspent, further liability to tax is generated and the process is self-defeating. The DGT is, it has to be said, a fairly rigid arrangement, since the income can’t be varied or waived. An alternative that many find of


interest is a type of packaged product market by a handful of life companies, which in simple terms is a trust arrangement containing a


sequence of individual life policies with set annual maturity dates. Before each maturity date you can elect to defer the maturity if there is no need for the money, or you can take the income in full or in part. Only the profit on each policy is subject to income tax and only if income is taken, otherwise there is no tax within the investment, as the growth rolls up tax-free in an offshore life assurance policy. The gift at outset is treated as a potentially exempt transfer for IHT purposes and is not taxable if within the NRB, as with the DGT above. All growth on the investment falls outside the estate, which is a worthwhile feature of the plan. After seven years there is no charge to IHT provided you are still alive but if you don’t make it, the usual taper relief rules apply; ie no discount for the first three years but 20% for each subsequent year up to the seventh. If all goes well and you are still alive after seven years, you can have a further bite of the cherry and do some further planning. As ever, a word or two of caution is


needed. It is clearly important not to tie up capital in trust vehicles if a little further down the road you decide that you do in fact need access to the capital sum. In addition the stance taken by HMRC may change in the future as to these schemes. In fairness though, these schemes have been around a while now and our friends at HMRC have made no objections so far. Having probably failed to cheer


you up with these musings on mortality, but no doubt having stoked up your excitement at thoughts of saving tax, albeit after shuffling off your mortal coil, it might be more pleasant to focus on the glorious summer that is now upon us. The grapes in Sauternes are now sucking in the sunshine and the vignerons have stopped bleating about the hitherto dreadful weather. In some ways it had been reminiscent of being


53


in the UK up to the start of July. Each weekend the local villages are taking turns to host their “fete” and evening markets are now in full swing, with the scent of grilling duck heavy in the air. Meanwhile the English pubs are serving Fish and Chips to the holiday homers, and the mobile chippie can be seen meandering its way through the lanes of Dordogneshire. There is even a mobile curry van, however, speaking from experience, it is better to restrain curiosity and give the dodgy chicken tikka masala a wide berth. On the domestic front, our little


one has made a prompt start on the “terrible 2s”, as her second birthday has only just gone. Although a student of the French language for most of my life, I have only in the last week discovered the phrase that describes this toddler stroppiness. La période Non! is what they call it here and you can’t help feeling the French have a way with words, can you?


Joe Coten is a member of the Personal Finance Society. He may be reached on 0207 588 9626.


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60  |  Page 61  |  Page 62  |  Page 63  |  Page 64  |  Page 65  |  Page 66  |  Page 67  |  Page 68