Key IHT rulings press case for proper planning

Inheritance tax planning is vital, particularly as more people than ever before will become liable for the tax on the back of soaring property prices and general increased wealth.

The issues surrounding inheritance tax (IHT) are constantly in the news – over the past couple of months a pair of elderly British sisters were told by courts in the UK and at the EU level that they could not enjoy the same rights as married and gay couples when it comes to IHT– and most people are aware that some level of planning is required to mitigate the impact of meeting the tax.

However, according to Axa Wealth Management’s head of development Mark Wilkinson, due to the complexity of new rules relating to the transferable nil rate tax bands for inheritance tax, many couples could find themselves facing an increased tax bill.

Wilkinson points out new rules which mean that for deaths on or after 9 October 2007 it will be possible for spouses and civil partners to transfer their unused inheritance tax nil rate band allowances to their surviving spouse or civil partner.

"The new rules mean that any proportion of the nil rate band that was not used when the first spouse or civil partner died can be transferred to the surviving spouse or civil partner for use on their subsequent death. In tax year 2008/2009 a maximum of £624,000 will therefore be available on the death of the survivor," he explains.

However, Wilkinson warns: "Many couples in today's society will not benefit. The main requirement for couples to qualify for the transferable nil rate tax band is that they must be married, or be civil partners. Therefore the growing number of people who live together as common law partners, have children together and have joint banking facilities and mortgages together, will not be able to benefit from the new rules."

While people run the risk of being caught out due to their marital status, age is another vital issue that must be considered when looking at inheritance tax planning.

As the executors of an elderly lady’s estate discovered, HM Revenue & Customs (HMRC) can take a hard line when it comes to age.

The lady in question, Mrs Bowers, who was in her nineties, set up a discounted gift trust in 2002 but died five months later. According to HMRC someone aged 90 or over would receive little or no discount because, at that age, they would be uninsurable.

While Mrs Bowers’ executors did not agree, and managed to have an adjusted discount figure set, HMRC appealed the decision in order to gain a greater share of IHT from the estate.

Julie Hutchison, head of estate planning at Standard Life, pointed out ahead of the appeal decision that it was vital for the outcome to be know as soon as possible in order to clear up this tax planning grey area.

"The final outcome once all steps are heard will bring clarity one way or the other for advisers and their clients on whether settlors over the age of 90 should receive a discount," she says. "I welcome the statement that HMRC will not press for payment of additional IHT pending final resolution of the Bower case."

2 May 2008