Death and affordable taxes

Inheritance tax has spiralled during the past 10 years. But many people are paying too much, reports John Browne

Martin Chuzzlewit is on our screens. A serial that is built around inheritance and a will. It has an audience of one million adults watching the television adaptation each week. Of these, 70 per cent do not have a will and 90 per cent think that inheritance tax (IHT) is something that only the very rich have to worry about. They are, of course, wrong and unless they take sensible advice, the real beneficiary from their estates will be HM Treasury, not the intended heirs.

Each year u1.4 billion inheritance tax is paid on 24,000 cases. That means u60,000 tax per case, a 300 per cent increase in 10 years. No one would be surprised to hear that this was a market for clever, high powered tax specialists, but the real surprise is that the biggest requirement is actually for basic, non-complex financial help, ideally delivered by the advising solicitor. The prize for clients is that 60 per cent of IHT can be avoided.

IFA Promotion has researched this area extensively. Joanne Hindle, chief executive, confirms that half the u 1.4 billion tax bill is paid unnecessarily and Hindle and her team have also isolated u180 million which is either paid in error or which could be avoided with a minimum of financial planning help from clients' solicitors.

As marketeers, we try to understand why clients are apparently so relaxed about paying this largely voluntary tax bill. One reason is ignorance. The u150,000 IHT nil rate band sounds high to many people because they forget to add the value of their house and life assurance proceeds when calculating their net worth. The reality is that these days, a u300,000 plus gross estate is not unusual for people who may have only modest income and liquid savings. Other things being equal, this ignorance can generate a substantial, unnecessary and unexpected u60,000 plus tax bill if no action is taken.

The second reason is more emotional, the tender trap. Since a spouse inherits without paying IHT, the easy view for the client to take is that there is nothing to worry about provided everything is left to the spouse. This also allows the client to postpone some possibly difficult decisions about division of the family wealth between husband and wife. These decisions are postponed at a considerable cost. Some well-chosen examples of the what-happens-next variety will illustrate the dangers of this route when the surviving spouse dies.

A third reason for client inaction is the relative size of the IHT bill. Nationally, IHT, at u1.4 billion is dwarfed by annual income tax which nets u65 billion and national insurance u43 billion. At a time when over two million individuals are paying higher rate income tax, which now starts to bite at only 1.5 times average male earnings, IHT is seen as just another unavoidable 40 per cent tax.

The big difference is that IHT offers greater scope for planning than income tax or national insurance.

Firms use various ways of getting these messages across to clients. When talking to an audience about financial services and IHT planning then case studies and family portrait examples are powerful ways of illustrating the value of a firm's advisory role. Work with individual clients can use case studies but they need to be supplemented with background work and examples specific to your client's situation.

Overall, IHT planning is a real opportunity to demonstrate the value of independent, non-product related, financial advice to your clients.

The present tax system of CGT and IHT taken together allows very considerable scope for wealth to be transferred between individuals without suffering any tax.

The provisions of IHT allow great scope for prudent and well-advised taxpayers to pass on a large part of their wealth exactly as they intended. Next episode of Martin Chuzzlewit please.

John Browne is MD of Strategic Advantage, a business planning consultancy for law firms and financial organisations.