threesixty Warns Overlooked IHT Clause Will Impact Top Clients
IFAs need to react fast to an important clause published in the Finance Act 2006 that impacts a number of top-end inheritance tax (IHT) clients, warns threesixty, the provider of support services to independent financial advisers.
The Finance Act 2006, published in July, introduced the new Section 46A into the Inheritance Tax Act 1984. The change affects life policies written in trust, which are essential tools for IFAs in mitigating IHT liability.
The new section now allows preferential Potentially Exempt Transfer (PET) tax treatment to be applied to regular premiums paid directly into life policies written in trust where the policy was held within the trust prior to Budget day. PET treatment exempts a policy in trust from any immediate IHT liability and allows it to continue to be a “Pre-Budget Trust”, which means it is exempt from the 10-yearly and exit tax charges that were introduced in the last Budget.
Prior to the latest Finance Act, regular premiums paid into life policies written in trust did not qualify for PET treatment. However, the premiums did qualify if they were paid indirectly via a trustee bank account. This was the preferred option when premiums exceeded the £3000 per annum that was entitled to tax exemption anyway.
As a result of the changes, clients who are still paying premiums indirectly via trustee bank accounts into trusts set up before the Budget should now stop doing so and pay them in directly instead, recommends threesixty. If premiums are paid indirectly via trustee bank accounts then the trust will be deemed a ‘Post-Budget Trust’, which is now subject to the periodic and exit tax charges.
IFAs who fail to pick up on these changes, which have been overlooked by many industry observers, will put their clients at a tax disadvantage, threesixty says. David Ingram, a partner at threesixty, commented: “The number of clients affected by these changes will be relatively low, but they will be among IFAs’ best clients so it is important that immediate action is taken.”