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Provide a one-stop-shop for clients, advises Colin Studd
Inheritance Tax, a combined gift tax and death duty, was introduced in the 1986 Finance Act, replacing Capital Transfer Tax which in turn replaced Estate Duty. The act received the Royal Assent on 25 July 1986 and applies to all transfers made on or after the 18 March 1986.
At the Conservative Party Conference three years ago the Prime Minister, John Major, spoke about his vision of "wealth cascading down through generations" and it was then rumoured that Inheritance Tax (IHT) would be changed dramatically, if not scrapped altogether, in the 1992 Budget.
In the event, this was not to be, and the nil rate band was raised only from u140,000 to u150,000, and has since remained unchanged.
Even now, after a protracted recession, IHT still poses a threat to many clients' estates, and it is important for them to start planning early to maximise potential savings.
This planning begins with the will, and works outwards often to incorporate a life assurance policy written in trust. This is often the simplest and most effective way of helping to provide for the tax liability.
Unfortunately, by the time many clients start worrying about IHT, they may be too ill or too old to afford the premiums for a life assurance policy, because they are far higher for policies started later in life.
Life assurance is one of the best ways for providing for IHT, but the tax treatment needs to be watched closely. Policies can be used specifically in IHT planning to establish a capital sum for the eventual payment of the tax, and as a way of making gifts to beneficiaries.
Term assurance protection, which includes seven-year reducing cover, has become increasingly cheaper of late for clients in good health, for two reasons. Firstly, increased competition amongst those insurance companies that specialise in term assurance and, secondly, the spectre of AIDS seems to have diminished.
There are fortunately other types of scheme available which can help mitigate the effect of IHT.
The simplest of these would incorporate wills making the use of both a husband's and wife's u150,000 nil rate allowance.
More complex schemes will gradually move money out of a client's estate, while still allowing him access to both capital and income.
Provided the client only wishes to have an income, a discount on a lifetime transfer can be obtained, which is effective immediately.
The capital will fall outside the estate entirely after seven years in line with the PET rules. Set up correctly this should not create a gift with reservation.
The financial services department of a law firm can offer their advice in all these matters, having analysed the market and compared all the rates available on their computer system.
The private client and financial services departments work in tandem, complement each other and can greatly assist in overall planning.
Clients are also happy with the knowledge that all the work is being done under one roof and that outside parties are unnecessary. This also helps to keep costs down.
Colin Studd is a financial adviser at Cumberland Ellis Piers.