Mortgage brokers are, for many people, the only financial adviser that they have contact with as, despite what the Sunday papers may believe, Joe Public does not have thousands to plough into the latest offshore investment.
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But many clients have homes worth hundreds of thousands and so are concerned about inheritance tax (IHT). Around 4.8 million people have properties valued over the IHT threshold, and 9.4 million have total estates, which exceed it. Brokers appreciate better than anyone that the family home is probably the most emotive possession, and many people want to leave it to their children.
However, until recently, most commentary on IHT concentrated on exotic schemes for high net worth individuals. Nowadays, there is a greater realisation that most people’s potential liability to IHT is primarily their home, and that traditional financial practitioners don’t have a solution as, unlike other investments, it cannot be given away brick by brick.
Looking at the options
So what are the options for the family property, assuming all other prudent IHT planning has been
considered? There are a number of schemes in place to help alleviate some of the worries, and to secure a firm financial future. These include:
- Gift of the house while continuing to live in it
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- Creating a debt with equity release
- Whole-of-life policies to extract funds from the debt
Question marks
Due to the question marks hanging over the sector, a number of firms have sought to establish themselves in the growing marketplace. Property Wealth Manager is an IHT mitigation scheme marketed in the UK by Close Investments on behalf of the product provider, Isle of Man Assurance Limited, that can produce significant IHT savings. It utilises a reversion plan and an offshore unit-linked whole-of-life bond. This overcomes longevity and underwriting issues as the bond’s life cover is effectively exchanged for the house value.
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The fund owns all the properties and therefore the family has the opportunity to buy the home back at death, subject to paying a much-reduced tax bill. Normally, the policy is given away and so its value is removed from the estate, assuming a seven-year survival. Even if death occurs within seven years, the IHT bill is reduced, as the value of the gift for IHT purposes is lower than the property value.
Also, clients continue to benefit from house price movements, albeit of all the properties in the fund rather than the value of your own home, with only the chargeable gain in the fund being subject to income tax.
Additionally, if your client’s circumstances change, then they can encash the bond subject to a standard discount factor reflecting their expected mortality.
Because the system uses mainstream tried and trusted tax planning and products familiar to brokers, it is not on the radar of HMRC as an aggressive tax scheme. All the client has done is raise funds through a property reversion contract and use the funds to buy a life assurance contract, which they have then given away. These are distinct steps that individuals ordinarily transact on a regular basis. Options such as these could help the market in establishing itself, and provide confidence to borrowers concerned about IHT implications.
