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Financial companies need to listen to advisers about IHT

There is some truth to recent articles about the end of free technical support services for advisers. Across the industry it’s clear that such services are in retreat. It’s not universal – some companies (including Canada Life) continue to be open for business for advisers, providing the key range of CPD-qualifying webinars, articles, social media and contact points that can be a godsend for advisers when there’s a complex query. 

As such we know that IHT queries are a pressing concern for many. Even after the Office of Tax Simplification’s recent report, a root-and-branch overhaul of the system does not seem to be on the cards. Many advisers are, with good reason, struggling with the complexities of a system that at times seems more ad-hoc than planned. 

After analysing the thousands of adviser queries we get each year, there are clear and specific areas of IHT confusion to be addressed.

Top 3 IHT queries

1. If, on first death, everything is left to the surviving spouse/civil partner, does the survivor now have a lifetime gift threshold of £650,000?

Unfortunately, the answer is no, as any available transferable nil rate band (TNRB) can only be used against the IHT arising on the death of the surviving spouse - it cannot be used by the surviving spouse/civil partner for lifetime gifting. 

There is also a lot of confusion around transferring the residence nil rate band (RNRB), which was introduced in April 2017. The RNRB is transferable between spouses/civil partners on death, much like the standard nil rate band (NRB). It is the unused percentage of the RNRB from the estate of the first to die which can be claimed on the second death. If the first death occurred before April 2017, on the survivor’s death there will be a 100% RNRB available irrespective of whether the first death owned residential property. However, if the first death’s estate was greater than £2m, then the RNRB would be tapered.

It is also important to remember here that NRBs transfer as percentages not amounts, ensuring the NRB at the time of the second death is increased by the proportion of the NRB unused on the first death.

2. What needs to be included when valuing a trust?

The answer depends on the type of trust. Calculating the value of a trust is relatively straightforward if you are dealing with a discretionary gift trust, however it is a little more complicated for gift and loan trusts and discounted gift trusts. 

Under a gift and loan trust, any outstanding loan due back to the settlor needs to be deducted from the value of the trust.

For a discounted gift trust, if the settlor is still alive, the trustees have an obligation to provide regular payments to them and the actuarial value of this commitment should be deducted from the value of the trust. 

When looking at what distributions need to be factored into the periodic charge calculation, these refer to distributions to beneficiaries. 

If the trust allows reversions back to the settlor and these are correctly carved out in the trust at outset, they will not be treated as distributions. Likewise, neither will any loan repayments made to a settlor under a gift and loan trust be treated as a distribution.

Trustees will need to be aware of previous transfers made by the settlor and that these gifts can have an impact for the lifetime of the trust. As more and more discretionary trusts are approaching their tenth anniversary, questions around how the periodic charge is calculated have increased.

3. When does the 14-year shadow take effect on CLTs and PETs?

People have heard of the 14-year shadow (which relates to gift trust exemptions) but are unsure when it becomes relevant. The 14-year shadow is only an issue if, on death, the total of the Chargeable Lifetime Transfers (CLTs) and Potentially Exempt Transfers (PETs) made in the previous seven years exceeds the available NRB, meaning that tax is payable.

For those considering making a PET and a CLT at or around the same time, it is logical to make the CLT before the PET as this can impact the periodic charges. However, when making a PET the donor should also be wary of any CLTs made in the previous seven years, and this is where professional advice is paramount.

When looking at the tax on a failed PET we also have to go back seven years from the date of the PET. If a CLT had been made within this seven-year period, this needs to be taken into account when calculating the tax on the failed PET – and casts a potential shadow of 14 years on the overall IHT.

Financial services firms need to be responsive to advisers

While these examples show the specific nature of much of the confusion, there’s an awful lot that still isn’t covered off in the above. 

What’s not in question is the need for an ongoing technical relationship between advisers and financial services companies that’s rich in detail and depth. Financial services firms need to be responsive to advisers and provide content in the right form. Sometimes that’s a webinar or article that can be reviewed repeatedly; at other times it’s direct contact. In any case, that ongoing support should be dynamic and based around both parties listening to one another.