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Inheritance Tax – Could there be a better alternative?

Inheritance tax is enormously unpopular to say the least. A YouGov poll found that 59% of the public deemed it unfair, making it the least popular of Britain’s 11 major taxes. What’s more, the tax has a limited revenue raising ability, with the ‘well advised’ often using gifts, trusts, business property relief and agricultural relief to avoid paying so much.

As it stands, the tax affects just 4% of British estates and contributes only 77p of every £100 of total taxation. This puts the tax in the awkward position of being both highly unpopular and raising very little revenue. At the moment, the inheritance tax threshold stands at £325,000 per person. If you own your own home and are leaving it to a direct descendant in your will, this lifts the threshold by an additional £125,000 in the 2018-19 tax year (the nil-rate band), to £450,000. Anything above this is subject to a 40% tax.

Inheritance tax is seen as unfair because it is a tax on giving (while normal taxes apply to earnings) and it is a ‘double tax’ on people who have already earned – and been taxed on – their wealth.

However, the Resolution Foundation, a prominent independent think tank, has suggested an alternative.

They propose abolishing inheritance tax and replacing it with a lifetime receipts tax.

This would see individuals given a lump sum they could inherit tax free through their lifetime and would then have to pay tax on any inheritance they receive that exceeds this threshold. The thinktank suggests that by setting a lifetime limit of £125,000 and then applying inheritance tax at 20% up to £500,000 and 30% after that would be both fairer and harder to avoid.

They predict that a lifetime receipts tax would raise an extra £5 billion by 2021, bringing in £11 billion rather than the £6 billion inheritance tax currently raises. In a time of mounting pressure on public services like the NHS, this additional revenue would be welcomed by many.

Moving away from inheritance tax would reduce many of the current ways to manage the amount of assets an individual is taxed on upon death. For instance, people would not be able to reduce the size of their taxable estate by giving away liquid assets seven years prior to their death.

The Resolution Foundation also suggests restricting business property and agricultural relief to small family businesses.

The lifetime receipts tax is, at the moment, just a think tank recommendation and is not being considered by the government.

However, the government are trying to introduce changes to probate fees that would see estates worth £2 million or more pay £6,000 in probate fees, up from the current rate of £215. This proposal has seen little support in the House of Lords and the government may consider scrapping the tax.

Sources
https://www.telegraph.co.uk/tax/inheritance/government-could-back-disguised-death-tax-following-lords-pressure/
https://www.accountancyage.com/2018/05/03/inheritance-tax-is-unfit-for-modern-society-and-should-be-abolished-says-think-tank/

Ten ways to cut Inheritance Tax Liability

As a starting point, every individual is entitled to a nil rate band, under which no inheritance tax is payable. For the current tax year, the nil rate band is £325,000. Any inheritable assets over that threshold figure can attract a tax of 40%, payable to HM Revenue & Customs.

There are however a number of steps, using exemptions and allowances that you can take to minimise this tax liability. Most of these are about ensuring that the threshold is not ultimately crossed, your wishes are fulfilled and intended beneficiaries do not miss out.

?A first step toward avoiding Inheritance Tax (IHT) could be by making a will, particularly if your partner or spouse is the intended main beneficiary. Put your affairs in order and don’t ignore the inevitability of your death!
?Consider making early gifts in the hope and expectation that you will live for seven years after any gift is made. Gifts made more than seven years before the donor dies are free of IHT. Search for ways of helping the younger generation to benefit, for example helping with school or university tuition fees.
?For some gifts to be IHT free, you don’t need to survive for seven years. Consider using smaller allowances such as the £3,000 per person annual allowance for gifts to anybody and the ability to give up to £5,000 to your children when they marry. This could be £5,000 from each parent to each adult child.
Discretionary trusts can be set up and enable assets up to the nil rate band of IHT of £325,000 per person, or £650,000 per married couple or civil partnership, to be sheltered from IHT, so long as the donor survives seven years. Unlike outright gifts, these trusts let donors retain control of the assets.

A habit of gifting may cut your IHT liability if you can show that such gifts are made out of income, are made on a regular basis and they do not reduce your own standard of living.

Consider becoming an agricultural landowner. In general, agricultural land which is let out can become IHT-free after seven years and could be IHT-free after two years if you farm it. Complex rules govern business property and agricultural land reliefs, so professional advice should always be taken.

If you have suffered injuries in the past during military service and this becomes a contributory factor to your death, then your estate may become IHT-free.

It is not possible to shelter your family home from IHT if you remain living in it, so another solution could be to spend some of the wealth in the asset before it can be taken into account for tax, for example via an equity release scheme.

Individual Savings Accounts (ISAs), whilst being popular ways of avoiding tax on income and gains from a wide variety of savings and investments, have no protection against IHT. Plans to minimise your IHT liability should include seeking to reduce any ISA component.

If you have substantial overseas assets, choosing a tax friendly location abroad where you wish to be buried may help you avoid IHT on those overseas assets. A somewhat drastic step to take, but where you intend to be buried can be deemed to be where you are domiciled and if domiciled overseas, only your assets based in the UK are subject to inheritance tax.

The information above has been prepared solely for the purpose of providing a basic introduction to IHT planning.
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For more information please see our Beginners Guide to Inheritance Tax here

Inheritance Tax – The Forgotten Battleground

Not so long ago Tory promises of an increased nil rate band prompted the then Chancellor, Alistair Darling, to introduce new legislation to effectively double the nil rate band for married couples and those in civil partnerships. Inheritance Tax was an important battleground but, as house price growth went into reverse and stock markets fell, it became less of a vote winner.

With a coalition government, compromise is necessary from the outset and inevitably both sides have to sacrifice manifesto pledges. The good news is that the Liberal Democrat Mansion Tax has not survived; the bad news is that neither has the promised £1million nil rate band. In fact, the nil rate band remains frozen for the next 4 years at £325,000. This means more and more estates will fall back into the Inheritance Tax trap. A £650,000 estate increasing in value by 3% per year (probably less than the rate of inflation) will mean the tax bill faced by beneficiaries will increase by approximatley £150 per week over the next 4 years.

So what can be done?

A few years ago including a trust provision within the Wills of married couples was standard practice since it allowed both spouses to utilise their nil rate bands without jeopardizing the security of the survivor. The introduction of the transferable nil rate band effectively rendered such tax planning redundant but, with a static nil rate band, such planning again has appeal. If assets are hived off to a trust on the first death, any future growth falls outside of the estate of the surviving spouse. By contrast, assets passed directly to the surviving spouse effectively means the survivor inherits an extra Nil Rate Band. If the value of the estate increases by 3% a year and the nil rate band stays static, the trust saves £22,000 in tax over 4 years. Of course, the Inheritance Tax position needs to be balanced against possible increases in income and capital gains tax but these taxes too can be mitigated with good advice.

Having reviewed your Wills to ensure maximum tax efficiency, it is then time to look at further planning which can be undertaken now.

Lifetime planning falls neatly into three strategies: reduce; convert; insure.

Gifts can reduce the value of an estate but of course, tax savings should not be made at the expense of your financial security. Although there are exemptions, large gifts need to be survived by 7 years.

By contrast buying assets which qualify for Business Property Relief or Agricultural Property Relief delivers tax savings after just 2 years but the tax advantages need to be weighed against the investment risks.

If neither of these strategies is practical, the final option is to insure against the liability. This is not a solution but it does at least mean that your beneficiaries have the means to pay the tax bill.

Inheritance Tax is a complex area and one size certainly does not fit all, please take professional advice.