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Planning ahead with your family is the best way to deal with Inheritance Tax
The idea behind Inheritance Tax (IHT) is not new. Probate Duty goes back as far as the Stamps Act 1694, levied to continue financing England’s role in the Nine Years War.¹
In 1780, to help fund Britain’s involvement in the American Revolutionary War, the Chancellor, Lord North introduced a graduated tax, which meant that the more money was in the estate, the higher the rate it would be charged.² After a few adjustments, the origin of modern-day IHT took shape.
To say it is an unpopular tax would be an understatement. In its recent report on IHT, a cross-party group of MPs said, “The current Inheritance Tax regime raises strong opinions across the political system and more widely among the public, due to its perceived unfairness and complexity.”
In continuing to levy IHT, the UK is out of step with a number of its European counterparts. Austria and Germany abolished wealth taxes on the grounds that they were fundamentally unfair, since precise valuation and comprehensive coverage is impossible. Sweden, which does not levy IHT, got rid of wealth taxes as rich Swedes voted with their feet and left the country.³
Tony Wickenden offers his advice to those looking to reduce their IHT bills.
Record levels of IHT
Nevertheless, revenues from IHT revenues have reached record levels, with over £5.4 billion raised during in 2018/19. By 2023, this figure is expected to reach £6.3 billion. ⁴
The threshold for IHT was frozen at £325,000 in 2009/10 and will remain so until at least 2021. Since then, the total value of assets of estates on which tax was paid has risen by £80.1 billion. HMRC estimates that about 80% of this increase has come from residential property, reflecting a rise in house prices of over 30%.⁵ Wilsons, the law firm, has estimated that had the IHT threshold increased in line with inflation, it would now be £432,000.
Understanding the Residents’ Nil Rate Band
Since April 2017, all UK residents have an additional tax-free allowance which can be used if their home is passed to a direct descendant. This is known as the 'Residence Nil Rate Band' (RNRB). The allowance for this tax year is £150,000, rising to £175,000 in April. There are complexities to the RNRB, but it’s a further useful allowance to be utilised to maximise the legacy left to your family.
“While it’s important to be as tax-efficient as possible, it’s not as important as making sure your money ends up in the right place, which is why making a Will is critical,” advises Edward Grant, Director at Technical Connection. “Trusts can also be useful in this respect. For example, life assurance can also be put into a trust to pay future IHT bills.”*
“The money may be there, but often people are struggling to get money to their children,” says Grant. “This is where planning can make a difference.”
Grant suggests making use of as many gifting allowances from your income and capital as you can. “It’s often better, and certainly more rewarding, to help your family while you are alive. Too many people are waiting too long to plan for IHT and never see the benefits.”
"The threshold for IHT was frozen at £325,000 in 2009/10 and will remain so until at least 2021."
Mood for change?
There is a will for some reform of IHT. Previous Chancellor, Philip Hammond, asked the Office of Tax Simplification (OTS) to look at ways of making IHT less complex. In January last year, the OTS recommended the introduction of a new personal gifts allowance over the current level of £3,000 a year, cutting the seven-year cumulation period for lifetime gifts to five years and abolishing complicated tapered reliefs.
In a similar vein, the All-Party Parliamentary Group suggested replacing the current IHT regime (which combines a high flat-rate of 40% with several reliefs) by a flat-rate gift tax payable of 10% on transfers of assets up to £2 million and 20% on the balance of the estate. Some of this would be payable on gifts during the donor’s lifetime, some after.⁶
The main principle, according to the MPs’ report, is that IHT should be low enough to be broadly based, without the need for complex relief. Under its proposals, all existing reliefs, other than exemptions on transfers to spouses and charities, would be abolished.
The government is believed to be studying these options. However, the unexpected appointment of Rishi Sunak as Chancellor so close to the Budget makes it even more difficult to predict whether reform is on the cards this year or not.
The best course of action is to plan for the worst and hope for the best. After all, IHT is often referred to as a voluntary tax, since a considerable sum is raised each year simply because families are not putting in place plans to mitigate its effects. With the end of the tax year approaching, this is the time to take action.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
* Trusts are not regulated by the Financial Conduct Authority.
¹ ² www.finalduties.co.uk, April 2018
³ ⁶ APPG, Reform of Inheritance Tax, January 2020
⁴ ⁵ HMRC, National Statistics, December 2019
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