New Record High For Inheritance Tax Payments
New figures from HMRC show an alarming 13% year on year rise in Inheritance Tax receipts, raking in a staggering £5.3 billion to the end of February. These record sums forced Chancellor Phillip Hammond to instigate reforms in the notoriously complex IHT system.
The review of the system was ordered at the end of January but the timescale is unclear and the threshold of IHT (which has remained at £325,000 since 2009) has not been cited thus far.
Interestingly, the combination of the unchanged IHT threshold and soaring property prices are the main reasons that more people are eligible for death duties. Substantial portions of peoples’ estates are now being taken, often quite unexpectedly, by HMRC through IHT. The value of these is rising at a startling rate and no one wants their descendants to be landed with hefty and avoidable IHT bills.
The Government have introduced the residence nil rate band (RNRB) which was gradually bought in from April 2017. Under the RNRB married couples or those in civil partnerships will eventually have an extra £350,000 worth of IHT free allowance per couple. Unfortunately it is not fully phased in until the 2020/21 tax year and the rules are extremely complex.
Another quirk in IHT which needs resolving is extending civil partnerships to couples of different genders and the next step in this change would be full legal rights for unmarried and non civil partner cohabiting couples. Since 2006 the law in Scotland gives some cohabitees some rights but not to tax exemptions and the Law Commission in England and Wales did not suggest that in its’ report at the time. The President of the Supreme Court has said several times that cohabiting couples should have more rights when their relationship ends but she has not suggested tax rights on death. At the moment, a bereaved partner without legal status may not just be landed with a large and perhaps unexpected IHT bill, they can also lose their home.
Lord Willetts said recently that IHT was “poorly designed, widely abused and a classic bad tax with a very high rate and very high exemptions”. He went on to say “we could lower the rate but with a broader tax base which would be fairer for all”.
If you wish to avoid or reduce this punitive tax, careful planning from an IHT specialist is invaluable. Call us now.
Inheritance Tax is often described as incomprehensible. Executors often complain to Probate lawyers that the deceased could have done more to save inheritance tax. Of course by that stage it is too late to do anything about it. One solution is to take full advantage of the rules on gifts, which is something older generations seem perhaps reluctant to do.
Anyone who can afford to give away sums of money should consider doing so. Provided the benefactor lives 7 years after the gift is given the Assets gifted are not included in the estate so there is no inheritance tax liability. The 7 year condition does not apply to the annual exemption. Anyone can give away £3,000 per year with a carry over for any allowance not used in the previous year, therefore allowing a couple to give away £6,000 every year. It is also possible to give gifts of up to £5,000 for a wedding, smaller sums of £250 can be given to as many people as you want and gifts from surplus income are also considered to be outside an estate for inheritance tax purposes.
According to recent research however, the average amount people believe they can gift each year without incurring inheritance tax is £1,575. This is almost half the allowance. Interestingly, only one in 10 (12%) of survey respondents actually answered with the correct figure. The confusing nature of tax rules appears to be stopping either generation from benefitting from significant pools of wealth built up over years.
Nearly half of parents surveyed (44%) said they would give more money to their children if they were allowed to do so without tax implications, while more than one in three (35%) grandparents would do the same. Two in 5 (40%) just don’t feel confident enough to make financial gifts.
Perhaps the recent Government directed inheritance Tax review will make a difference, as the review will be carried out by the Office of Tax Simplification.
It is worth mentioning that the current annual gifting allowance has remained at £3,000 since the early 1980s. Industry professionals believe that if this was increased we would see more families pass wealth down through the generations. This will give younger people the financial leg up in life that they may need, particularly with soaring property prices and home ownership merely a dream for some. The additional benefit of course would be to help older generations from an inheritance tax perspective.
Contact us now to discuss the significant benefits of Inheritance Tax Planning for your family.