Often written about and commented upon by the media is the subject of Inheritance Tax and increasingly there is a feeling that the true implications of this tax are misunderstood.
We have a tax which is levied at 40% on everything you leave behind in excess of the standard nil rate band currently £325,000. Yet there is no need to pay the tax if you plan properly.
It would be fair to say Inheritance Tax could be viewed as an aspirational tax as it seems that there are many who presently care little about this tax, as they don’t believe the tax applies to them. Whether or not they aspire to build an estate with real value or not it seems more and more of us are rapidly falling within the grasp of this iniquitous tax. The time for action is now and not to wait until it is too late to undertake any meaningful planning.
So whilst some of us sob into our gin and tonics about the real possibility of having to pay Inheritance Tax on our modest estates, it would be fair to say HMRC are rubbing their hands with glee. They have recently reported record receipts for Inheritance Tax. In 2014/2015 the tax take for this tax was £3.8 billion and in 2015/2016 this had increased significantly to £4.8 billion this is an increase of an eye watering 22%. Pretty cool numbers for what is seen as a tax only the rich need to be concerned about.
The question is whether this is really a tax that affects only the wealthy or does its grasp reach further? The Office for Budget Responsibility forecast that over 450,000 families will in 2016/17 have to face the prospect of paying tax on their inheritances. (Interestingly records from the Office of National Statistics show that 525,000 people died in England and Wales in 2016). These numbers suggest we all have to address the possibility we may be subject to Inheritance Tax.
Planning your financial affairs can be easy or complicated the choice is yours. We have over the years witnessed some very sophisticated tax planning arrangements designed to reduce Inheritance Tax.
One of the latest cases was M L Salinger and J L Kirby v HMRC (2016). They appealed against HMRC’s determination that Inheritance Tax was due on the estate. The appeal was upheld. The arrangement involved the transfer of a reversionary interest into an offshore trust. The taxpayer’s standpoint was that the reversionary interest had no transfer value as no consideration was given. The First Tier Tribunal had to decide upon two questions and as noted their considered decisions on these two questions favoured the taxpayer over HMRC.
This is all very interesting and hopefully good news for the beneficiaries. But they had to fight against the initial verdict and then launch an appeal all of which will have delayed distributions from the estate. Defending cases such as this one is not without cost or uneasiness for the eventual beneficiaries, and HMRC rarely lose cases.
The good news is this tax, which in truth penalises the sensible savers can be reduced or even negated without the need to create complex tax shelters such as the one described. It is probably good advice not to invite scrutiny by HMRC
The simplest way to avoid Inheritance Tax is to make sure your estate is worth less than the nil rate band which is £325,000 or £650,000 if there is an unused spouse or civil partner allowance you can use. If you are an unmarried couple you still have your separate nil rate bands but this cannot be combined upon death.
Other opportunities are:
- The new residential nil rate band which has the potential to remove £1 million nil rate band by the year 2021 However, even with this new Inheritance Tax break the actual numbers who will eventually benefit from this tax break are limited.
- The new allowance is reduced by £1 for every £2 by which the estate is in excess of £2million.
- The clue is in the name, you have to have owned a property that was at one time your home. If you don’t own a property you cannot benefit
- It only applies to property left to direct descendants. So to a couple who are not married and not being direct lineal descendants they therefore do not qualify for the residential tax break.
- If the property is worth less than £175,000 (or £350,000 for a couple) the nil rate residential allowance has a limited advantage.
- You can make a gift of any size now and as long as you survive a period in excess of seven years the gift is deemed to no longer be within your estate. But should you die within the seven years the gift falls back into your estate. Nevertheless gifts between spouses, civil partners and charities are always treated as being tax free.
- You have an annual allowance of £3,000 each tax year which you can gift. There is also a marriage allowance of up to £5,000
- You can make gifts out of income as long as these gifts are regular in nature and do not impoverish the person making the payments.
- You can place a life insurance policy to cover your potential Inheritance Tax liability into trust and use this to pay the liability
- Equity release can be used to avoid Inheritance Tax. However this is an option you should treat with great care.
- Business Property relief and Agricultural property relief is available and also has the potential to reduce an estates exposure to Inheritance Tax
- Having a properly written Will is a must although is does not in itself reduce the liability to Inheritance Tax. There is the possibility with careful planning and good legal advice to pass the Inheritance Tax allowances down the generations.
- When you take out a Lasting Power of Attorney for Property and Financial Affairs you should ensure your Attorney(s) has the powers needed to continue any gifting you normally would have made.
The earlier one plans the more effective it can be and yes this is a tax which is more and more likely to affect all of us.
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