Tag: Inheritance Tax


Inheritance Tax Payments Have Doubled in the Last Decade

In the past, inheritance tax would have been regarded by many only as something for the super-wealthy to have to think about.

But the amount the government has collected in inheritance tax has doubled in the last decade, as more and more people are becoming liable to pay the charge.

According to Treasury documents seen by the Mail on Sunday, total receipts from inheritance tax now stand at £5.4 billion – up from £2.7 billion in 2010.

This increase is set to continue, with forecasts suggesting annual inheritance tax receipts could reach £7.6 billion in the next five years.

These latest figures are likely to further the argument that the inheritance tax threshold isn’t keeping pace with wider changes in the economic environment and people’s personal finances.

The inheritance tax threshold currently stands at £325,000, and this tax doesn’t have to be paid if:

  • You leave everything above the £325,000 to a spouse, civil partner or good cause
  • The value of your estate doesn’t exceed the threshold

The standard inheritance tax rate is 40%, and this is charged on anything in your estate that’s above the threshold.

However, house prices have risen dramatically in recent years, which is taking the total value of many people’s assets well above £325,000.

In fact, the latest figures from Nationwide show that the average price of a home in the UK now stands at £260,230, following a record increase of £29,162 over the last year.

This was the biggest cash increase in property prices that Nationwide has observed since it began collecting comparable data more than 30 years ago.

The data also suggests that annual house price inflation is accelerating, rising from 11.2 per cent in the year to January to 12.6 per cent in the year to the end of February.

So is the inheritance tax threshold now too low, and should it be keeping pace with house price growth?

The government plans to keep it at its current level until April 2026, so it will be interesting to see if Chancellor of the Exchequer Rishi Sunak addresses this issue in any way in his upcoming Budget on March 23rd.

The increase in house prices reflects how demand for property is far exceeding supply, and how the type of housing that many people are choosing to purchase has changed as a result of the pandemic.

It’s therefore possible that a push to build more homes could help to solve the issue of more people being pushed into paying inheritance tax, but this would be a long-term solution, with the effects not being felt for several years at least.

In the meantime, there will be a greater need than ever for people to get financial advice about managing their money and taking steps to avoid or reduce their inheritance tax liability.


Inheritance Tax reporting for excepted estates

HM Courts & Tribunals Service (HMCTS) has recently changed the Inheritance Tax (IHT) reporting requirements for excepted estates. An estate is referred to as an ‘excepted estate’ when no IHT is payable.

The changes apply to all deaths on or after 1 January 2022. If the date of death is on or after this date, an estate is usually an excepted estate if any of the following apply:

  • Its value is below the Inheritance Tax threshold, which is currently £325,000
  • The estate is worth £650,000 or less and any unused threshold is being transferred from a spouse or civil partner who died first
  • The deceased left everything to a spouse or civil partner living in the UK or to a qualifying charity and the estate is worth less than £3 million (search the charity register for registered UK charities)
  • The deceased was living permanently outside the UK (a ‘foreign domiciliary’) when they died and the value of their UK assets is under £150,000

These changes are expected to reduce the number of submissions that require a completed IHT form to obtain a Grant of Representation.

To summarise, the changes should not be considered a major simplification of the process, as the work to obtain these figures is still mostly required, but it may not need to be submitted on an IHT form.

Kings Court Trust

What are the proposed changes to IHT for siblings

At the moment, only those who are married or who are registered civil partners are exempt from paying inheritance tax (IHT) on money or property left to them by their spouse. This was expanded to include heterosexual civil partnerships at the end of 2019.

But the law does not cover siblings who are cohabiting.They are liable to pay the standard IHT rate of 40% of anything over the £325,000 threshold.

The injustice this poses for some households was highlighted by the recent case of Catherine and Virigina Utley. They have lived together for over 30 years in the house in Clapham which they both bought. Despite being co-owners, when one of them dies the surviving sister will be forced to sell the property to be able to pay the IHT, estimated at about £140,000. 

Shocked by the unfairness of this situation, Lord Lexden has brought a new Bill to the House of Lords. Under the new proposals, siblings would be exempt from paying IHT on property left to each other, provided they had lived together for at least seven years and that the surviving sibling was over 30. As well as brothers and sisters, the law would also apply to half brothers and sisters and be valid in England, Wales, Scotland and Northern Ireland.

While this would be good news for cohabiting siblings, some people feel the proposed changes do not go far enough. The new law still wouldn’t provide any protection for those who are cohabiting but who are not married or in a civil partnership. Cohabiting couples do not have any rights to their home on the death of their partner. In this respect, the UK is way behind other countries.  

A change to the law for cohabiting siblings in terms of IHT will raise questions as to where the line is drawn. Other platonic couples, such as parents and children, or friends who own a property together, may also want to be considered. The rules will have to be sufficiently tightly defined so as not to be open to abuse.      



Gifting rules and inheritance tax, what you might not know

Following an in depth study conducted by the National Centre for Social Research (NCSR) and the Institute for Fiscal Studies (IFS), it has been discovered that only one in four people making financial gifts are aware of the risks of inheritance tax. Further to this, they found that only 45% of gifters reported being aware of inheritance tax rules and exemptions when they gave their largest gift.

A staggeringly low 8% of respondents considered tax rules before making a financial gift and most did not associate gifting with inheritance tax. When compared with the fact that over half of respondents said that they planned to leave inheritance, it’s obvious that there seems to be a gap in gifter’s knowledge.

For those who were aware of the rules surrounding inheritance tax, 54% said this influenced the value of their largest gift. This was most prevalent amongst affluent taxpayers who had assets of £500,000 or more. Respondents below this threshold had more limited knowledge of the long-term effects of inheritance tax, the seven-year rule or the annual limit on gifts.

So, where does the money go?

80% of gifters gave to individuals, with charities coming in second at around 10%. The most common beneficiaries were adult children, followed by 15% giving to parents or other family members and 14% making gifts to friends. The most popular reasons were presents for birthdays and weddings.

The data also suggested that even when individuals considered inheritance tax rulings, it did not deter them from giving the gift.

The rules

You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’. You can carry any unused annual exemption forward to the next year – but only for one year.

For smaller gifts, you can give as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption on the same person.

The current starting threshold for inheritance tax for a single person is set at £325,000. This amount is then doubled for married couples and civil partners, who also have the additional benefit of the residential nil-rate band, which allows for a further £150,000 of tax-free, property-based inheritance per person. This particular allowance is set to rise to £175,000 as of the 6th of April 2020.

An unsuccessful PET is taxed depending on how long the gifter has lived following the giving of the gift and is referred to as ‘taper relief.’ If a gift is given less than three years before death, the full rate of 40% is applied to the gift, tapering off to 8% if the gift was given between six to seven years before death.

However, this is not the case when it comes to transactions with a reservation of benefit. For example, if you give away your home to your children and continue to occupy it rent-free, the property is still considered as forming part of your estate immediately if the worst were to happen. An individual cannot retain possession of a chattel or property whilst making a PET.

Though it may be difficult to plan for the worst, knowing how to best mitigate the tax surrounding gifts and inheritance can help you make key financial decisions at the most opportune moments, and prevent any avoidable losses when it comes to sharing your assets with the people and organisations that matter most to you.

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.


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.

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.