The Naked Investor: Misguided tax on inheritance
Published 10/12/2007 | 14:30
If you take a quick look back in history, you will find that it only took the Soviet bloc 50 years to realise that the Utopian dream that was communism was impossible to achieve.
And yet successive governments here have, for more than twice that period, quite inexplicably supported the imposition of inheritance tax (IHT) as a similarly misguided means of redistributing wealth.
There would be nothing wrong with IHT if it worked.
But all it has achieved so far is to undermine the entrepreneurial culture so vital to the country's future.
It was the Liberal government of Lord Rosebery that introduced "death" taxes in 1894.
The motive is the same now as then, namely that this duty is a tax on the undeserving, lazy and privileged and, presumably, favours those less prosperous and the under-privileged.
But there are many who hold the contrary view - i.e. that it is both factually wrong and morally reprehensible and that IHT is a posthumous tax on those successful, industrious individuals who make the greatest financial contribution to the UK economy.
There is also a certain amount of hypocrisy from politicians who decry any sort of privilege but at the same time send their children to private schools.
There are politicians in the current government who are said to have created their own special trusts in order to avoid IHT despite their own Chancellor's efforts to ensure that many more are caught in the IHT net via pre-owned asset taxes, trust taxes and so on.
Another argument maintains that taxes collected via IHT are wasted and that the really successful entrepreneurs like Bill Gates who are fully in favour of using their wealth for the betterment of mankind would rather spend their wealth effectively themselves and not via government.
Up until about 10 years ago IHT was borne only by those perceived by the public as extremely wealthy.
Now, due to the continuing rise in house prices, more and more people are being included - people who would definitely not consider themselves either lazy or privileged.
On this point the Tories recently put Labour on the spot by suggesting that the limit should be raised to £1m. The Government's response has been to make the IHT nil rate band transferable from spouse to spouse (or civil partner).
Despite this, more and more people will continue to be caught, not least because they lack the knowledge to avoid, or at least partly to avoid, IHT altogether.
Remember that anything over the nil rate band or bands will be taxed at 40%.
So attention given to some sensible measures now may well pay valuable dividends.
Where then is the best place to start?
Whilst I would not claim to be a legal beagle, common sense would suggest that a proper will would make a good starting point.
And yet there are thousands of people out there without an up-to-date will that accurately reflects their present needs.
It is all too easy to establish a will and then forget to adjust it accordingly when there is a change of circumstances.
You may not be aware, for instance, that divorce and remarriage automatically revoke a will.
And for co-habitees the spouse exemption rule does not apply and so a will is vitally important.
For anyone who dies without a will, the laws of intestacy will come into play and some of your estate may go to beneficiaries that you did not intend to benefit.
Finally, what happens if you are mentally or physically incapacitated or go into care?
There is an expedient called the 'enduring power of attorney' which must be set up whilst you are still of sound mind and that will only be invoked to manage your affairs should the need arise.
However, you will need to visit a solicitor to get this fully explained and drawn up.
This whole area is complex and if you need further assistance you can contact me via www.realwealthmanagers.co.uk.
Nicholas Watts is an independent financial adviser with Positive Solutions Financial Services, which is regulated by the Financial Services Authority.