Homeowners now have a new option to avoid paying tens, or possibly even hundreds of thousands of pounds in inheritance tax following the acceptance by HM Revenue & Customs of a new tax planning scheme.
Gordon Brown’s Budget in March signalled a government clampdown on schemes used to pass down wealth through the generations. It made IHT planning via a trust ineffective as all lifetime gifts made to a trust are now treated as “chargeable transfers” and subject to a 20 per cent charge if the value of the trust exceeds IHT nil rate band thresholds (currently £285,000).
But creative tax planners have discovered a new way to pass property on to family members tax efficiently.
The Private Wealth Manager plan from Close Brothers Investment and written offshore by Isle of Man Assurance, a privately-owned insurance company, enables anyone who owns their own home to pass on the value of that property to their family when they die without incurring the normal 40 per cent inheritance tax charge.
Close Brothers launched a pilot two years ago but without much fanfare – mainly because financial advisers were wary of offering an IHT planning product linked to property. But now that it has been signed off by the Revenue, experts are predicting that the scheme could take off among wealthy homeowners.
“This product will generate masses of interest from homeowners,” says Dean Mirfin, business development director at Key Retirement Solutions, the largest independent provider of equity release schemes. “We’ve noticed a growing appetite for people being able to pass on their property to children and this appears to be one way they can do this tax-free.”
Some traditional equity release plans have been popular with homeowners as a means of reducing inheritance tax but they tend to be either too complex or unsuitable for widespread use. But for those with considerable housing assets in their estate, equity release can still be a valid tool.
When used in IHT planning, standard equity release schemes release cash from your home and then use these funds to purchase whole of life insurance, which pays out a lump sum on death regardless of when you die. This can be an efficient way to mitigate IHT as payouts from whole of life policies are tax-free.
The latest product to come on the scene, the Property Wealth Management product, works in a similar way to standard equity release and life assurance plans.
The main difference is that it uses tax-efficient gift rules known as “potentially exempt transfers” to pass your property on to heirs. It works as follows. You effectively sell your home to a life assurance company in the Isle of Man, although you still retain all rights to live in your property until you die.
On your death, provided it is at least seven years after you first entered the scheme, your heirs inherit a sum of money, which should bear a close relation to the value of your property, without incurring inheritance tax. They can then either take this cash or use it to help buy back the property (see box).
Ged Hosty, director of In Retirement Services, who has overseen the implementation of the product, says: “There has been a lot of mistrust from independent financial advisers about products that claim to minimise IHT but now that we have had clearance from the Revenue, people are much more keen to enrol.”
However, he says that despite the product launching nine months ago only one person has fully signed up, although a further 10 are in the process of signing up.
Mark Neal, managing director of Economic Lifestyle, a financial services provider aimed at retirees, says that many people over the age of 65 are thinking about ways of minimising their tax bill when they die. He says: “Around one in five of our customers tells us that one of the reasons for releasing equity from their homes is to provide an early inheritance for their families. They are not simply using equity release schemes though. Many are downsizing by selling their existing homes and moving into properties more suitable for retirement.”
