Inheritance Tax (IHT) is a tax on the value of the estate (property, possessions, and money) of a person who has died, where the estate is worth over £325,000. It is charged at 40 percent for estates worth more than £325,000, with up to an extra £175,000 allowance towards a main residence if it is passed to children or grandchildren depending on the size of the estate. A married couple can share their allowance, meaning most parents can in effect pass on £1 million to their children without any tax being paid.
The Office for Budget Responsibility has forecast that IHT will raise £7.2 billion in tax revenue for the government in 2023/24. Whilst this sounds like an incredibly large amount, it does only represent 0.7% of all tax receipts in the UK.
Whilst IHT is clearly not a tax that contributes a large proportion of the total tax taken in the UK, it is a tax that is particularly divisive from a political perspective. Many people consider that those who have more should pay to help those who have less. On the other hand, some people think that IHT represents double taxation as it is levied after death on the accumulated income or capital of a person who was previously taxed while they were alive. It is also a tax that comes at a difficult time for bereaved families who may be struggling to cope with the death of a loved one.
IHT receipts have been increasing year on year, with the overall IHT liabilities being £5.76 billion for 2020/21. So, there are some compelling reasons for keeping it in play:
- The residential nil rate band allows for most houses to be inherited without paying IHT
The nil rate band, which is the threshold under which IHT is not due, has remained the same at £325,000 since 2009. During the same period the average house price in the UK has increased by 83%, from £155,417 in 2009 to £285,785 in 2022*. Considering that the family home often represents an individual’s main asset it is no wonder that IHT take has risen, although as indicated above, by sharing the allowance most parents can pass their houses on without incurring IHT.
The introduction of the residential nil rate band has helped to reduce the impact of rising house prices as it allows a property to be left to a direct descendent as long as the overall assets of the deceased individual do not exceed £2 million. Despite this, IHT revenues have continued to increase meaning a ‘win win’ situation for the government who have been able to take more tax through IHT each year without making any tax changes.
- There are tax reliefs for business owners which ensure the business isn’t subject to IHT
There are favourable tax reliefs in the format of Business Property Relief and Agricultural Property relief. These reliefs are designed to avoid IHT affecting an ongoing business or farming operation. Without these reliefs, a business might need to be sold in order to pay their tax bill and continue trading.
- Scrapping IHT would create a £7 billion tax hole
Given the increasing levels of funding required to support the UK economy, the Government are in a position where they will inevitably need to raise more funds from other taxes in order to afford to scrap IHT. Add to this the political sensitivity of IHT, and it is difficult to imagine it would be scrapped.
Will IHT apply to you?
Given the unlikelihood of the IHT regime disappearing any time soon, it remains important to review and consider your IHT position. Many people think this is an issue that will arise much later on in their lives, but some of the planning needs time and can involve big life decisions.
As a starting point, some points to consider are:
- Do you know what your IHT liability would currently be?
- Do you know what reliefs are available to you?
- Who do you want to pass assets to?
- Are there any assets you would like to protect after your death?
These are just some first things to initially think about when planning ahead. It is worth pointing out that in my experience as a personal tax adviser, many people do not even know what their IHT exposure is, which makes it very hard to decide what action they need to take. If you are unsure, it is important to consider getting professional advice to help you prepare for the future.
Consider gifting and investments to mitigate IHT exposure
Gifting can be an excellent IHT planning tool, but in most cases you need to live for seven years after making the gift for it to be considered outside your estate for tax purposes. It therefore makes sense to take action sooner, when you are fit and healthy, rather than later, when you may be less well. As gifting can trigger other tax liabilities such as Capital Gains Tax and Stamp Duty Land Tax and it is important to consider the overall picture and take professional advice from a tax adviser before making a gift.
Gifting is not the only option, and depending on your personal and family circumstances, it may be worth looking at other alternatives. If you are keen to retain ownership and control over your assets, making IHT efficient investments can be a good choice, although these investments often require a holding period of at least two years. Such investments can include shares listed on the Alternative Investment stock market, agricultural land or EIS (Enterprise Investment Scheme) qualifying companies. Alongside the tax benefit guidance from your tax adviser, it is important to obtain investment advice.
Given that every person has different assets, and diverse income and capital requirements, there is no one size fits all. An ideal solution is often a combination of options that creates the best outcome. Advice can therefore be important to ensure all of your goals can be met.
If you would like to talk to Simon Hurren or one of our Tax Advisers please email firstname.lastname@example.org or call 0330 058 6559.