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INHERITANCE TAX AND INCAPACITY
We’re fast approaching that time of year when theatres across the land will announce which former light entertainment stalwarts and former soap opera actors will star in their Christmas spectaculars.
However, Britain has a cast of pantomime villains who don’t necessarily tread the boards.
Take officials at HMRC, for instance, the very mention of whom is regularly greeted with a chorus of disapproval.
Without wishing either to be contrary or to curry favour, I think that the Revenue doesn’t merit all of the criticism which is fired its way.
As this year’s furore over the financial affairs of multi-national tech giants has indicated, most people, in fact, believe individuals and companies should pay their fair share of tax.
It’s interesting, therefore, to read the response to coverage of a case in which a multi-millionairess has avoided a considerable sum in Inheritance Tax (IHT).
The Court of Protection has ruled that the woman’s son – her sole surviving child – should be allowed to receive a near one-third million share of her £18.6 fortune (source) in addition to making further ‘gifts’ to a number of different charities.
He was appointed to look after her affairs eight years ago under a Lasting Power of Attorney (LPA) document.
The documents enable individuals to nominate someone to act on their behalf should they lose the mental capacity to make decisions relating to their finances, health and wellbeing or both.
Since executing the LPA, the woman has been diagnosed with dementia and now requires full-time care.
A judge acknowledged that whilst her son’s application to effectively receive a chunk of his inheritance while his mother was still alive was “self-serving”, it had “not been improperly brought”.
The Court had heard how he stood to inherit the vast majority of her wealth anyway under the terms of her will but had the decision not gone in the man’s favour, it would have meant 40 per cent of his mother’s estate exceeding the Nil Rate Band of £325,000 being swallowed up in IHT when she died.
It’s worth pointing out that the pair haven’t completely avoided IHT.
If the woman passes away within seven years of the £6 million approved as a gift by the Court of Protection being made, it will still be factored into her estate for taxation purposes, albeit with a discount for each year that she survives from now on.
Even though the outcome of the case was interesting enough, I found the largely sympathetic reaction to it particularly intriguing.
After all, it’s only three years since the Labour politicians David and Ed Miliband were criticised for using another perfectly legal instrument known as a ‘Deed of Variation’ to limit IHT liabilities after the death of their father.
Leaving aside the fact that any story involving party political figures is likely to divide opinion, I reckon that there is another issue responsible for the change in tone.
That is that more households in England and Wales find themselves at risk of paying IHT, mainly as a result of continually increasing property prices.
In some parts of the country, average prices are well in excess of that figure and appreciating still further.
That’s one reason why the Treasury recently reported record annual IHT receipts of £5.2 billion – up eight per cent or £388 million on the year before.
It seems that people are less inclined to wag the finger at those seeking to manage their exposure to tax if they realise that they may also have to address such concerns themselves.
Although the Court of Protection case featuring in this week’s news reports might seem unusual, it’s also worth bearing in mind data published by the Office for National Statistics in July which noted that whilst “age-standardised” mortality rates for “cancer, circulatory and respiratory diseases” had decreased steadily over the last decade, the rate of deaths from mental and behavioural disorders, including dementia, more than doubled over the same period.
It might still seem rather morbid to some people but I think it’s a good thing that the practical consequences of the end of a life are no longer taboo.
Just as people are arguably more conscious of the need to have life insurance or a pension and make a will, Inheritance Tax planning is a wholly worthwhile thing to do.
Read more about IHT below…