Tory inheritance tax pledges "dangerous"

Plans from the Conservative party for inheritance tax (IHT) have been severely criticised as leaving people open to tax bills.

The Tories have suggested if they come to power they will raise the IHT threshold to £2 million – compared to the current level of level of £312,000 – which can be doubled up for married couples.

However, wealth management firm Way Fund Managers is warning people not to sit back and avoid inheritance tax planning under the assumption the Tories will make changes.

WAY chairman and technical director Paul Wilcox urged people not to be complacent that they will avoid inheritance tax, especially as some may feel falling house prices could take them below the IHT threshold.

"Shadow chancellor George Osborne has been compromised into a pre-election confirmation of the Tories’ autumn 2007 pledge to effectively raise the threshold for IHT to £2 million – by allowing couples to transfer a spouse's £1 million allowance on their death to the surviving partner – which could prove to be a disastrous illusion for families thinking they will be protected from this widely loathed tax," said Mr Wilcox said.

"To push IHT planning to one side on the back of what is effectively a tenuous election promise – which is the likely result of this announcement for many taxpayers - is extremely dangerous."

He added promises made now by the Tories may not hit fruition, if they ever take power.

"But opposition parties always talk up their manifesto in order to win votes," Mr Wilcox said.

"In the absence of a coherent IHT strategy, our view is that the Tories will initially increase the individual Nil Rate Band to £0.5m so that there is a joint allowance of £1m.

"But even this increase assumes that they can cope with the financial consequences, which is far from a certainty bearing in mind deteriorating government finances."

He advised wealthy people to move assets out of their estates as soon as possible to start the seven year clock ticking – the time at which IHT on transfers of wealth stops applying.

"Using sophisticated trust style planning where they can retain access to those assets in the future should this be necessary," he said.

"This is particularly true at present when financial assets can be transferred at market-depressed prices thereby enhancing the impact of the planning so that recovery occurs outside of their estates."

Mr Wilcox added: "Since capital gains are now taxed at 18 per cent compared with higher rate income taxpayers’ 40 per cent, we recommend flexible trust structures, using direct investments such as collectives. Truly flexible structures mean that they can be re-thought in later years should the donor require extra funds, or if the need for IHT mitigation melts away."