IHT-Solutions

Sisters don't earn IHT exemption

One of the big legal changes last year was the implementation of the Civil Partnership Act 2004. This introduced the civil partnership as a marriage-like alternative for same-sex partners. The big bonus in respect of tax was that civil partners can now enjoy the same tax exemption as married couples. For instance, no IHT is payable when any gift either lifetime or on death is made between civil partners.

As a result of the Act, two sisters, Joyce (aged 88) and Sybil Burden (80) who have lived together all their lives took a case to the European Court of Human Rights claiming they were effectively entitled to similar rights to civil partners. In their case, the Inheritance tax due on the first of their deaths may force the survivor of them to sell their home.

In a suprisingly close judgement, the Court voted 4-3 against the sisters and they now have to decide whether they wish to take the case to appeal.

Whilst without doubt, the Burden sisters appear to have a fair case the consequences of their victory would have been far-reaching and, no doubt, a whole plethora of new cases could have resulted by virtue of a different judgement. For instance, how long would two family members have to live together before they would be entitled to the IHT exemption. If the time limit was too short, it would certainly be open to abuse. For the time being, however, we do not need to concern ourselves with these issues.

In the meantime, however, it should be pointed out than one specific difference between marriage and civil partnership is that there is no need for a civil partnership to be consummated. As a result, it would be possible, for instance, for two elderly ladies who have lived together as platonic friends for many years but who are not related, to enter into a civil partnership in order to obtain an IHT exemption.

One can seee a number of relationship permutations that could arise quite legally within a civil partnership which would enable the surviving partner to gain a full IHT exemption, in a way never envisaged by the Treasury.

Until next time, seasons greetings to all.

Pensions and IHT - it's all in the small print

I stand corrected. Whilst the Chancellor's pre-Budget report did not change or propose any changes to IHT threshold or inheritance tax rates, it did take the opportunity to close what the Treasury saw as an IHT loophole created in this year's budget.

In simple terms, as a result of the last Budget, certain types of personal pension plans did not have to be converted to annuities by the time the owner reached the age of 75. Instead, the remaining funds could form part of the estate of the pension owner on death and the fund could incur IHT at the usual 40%.

By virtue, of the pre-Budget report the post-75 pension fund monies will now incur penalty tax equating to up to 90% of the sum invested in the pension fund in a move clearly designed to force people to buy annuities by the age of 75.

Interestingly, this may actually lose the government tax receipts as it will be in the interests of wealthy pension holders to maximise the income from an annuity and to thereafter gift the income free of tax, where it can be shown that the income exceeds their normal expenditure.

I have a feeling that this loophole closure may be re-worked at some stage in the future as the baby-boomer generation become pensioners and a significant political force in the country.

Much ado about nothing

Well, Gordon Brown presented his pre-Budget report yesterday and many tax professionals feared new, if not significant, changes to the inheritance tax regime. Once again, Mr Brown has trumped us all, as there is no mention of Inheritance tax in the statement to Parliament or in the accompanying Treasury papers which set out the pre-Budget report in detail.

All in all, a bit of a damp squib. The good news for any harbingers of doom is that the next Budget will no doubt be presented during March 2007. This leaves plenty of time for the Treasury to draw up amendments to IHT and no doubt some of our national newspapers can run one or two front page "IHT scare stories" in the meantime.

I think there is a lesson to be learnt from all this. This is simply that life is too short to spend our time speculating what may or not be done to IHT by the government. Our duty is to take appropriate arrangements based on IHT rules as they stand and to plan to adapt our arrangements only in the light of actual changes made and not what we guess may happen.