Having mentioned Inheritance Tax in last week’s article, I thought that this might be a good point to revisit some points that often get missed in the discussion about Inheritance Tax. Discussions which will no doubt reappear as we speed towards October and the Autumn Statement – Will they? Won’t they? What changes might we see?
The vast majority of people in the UK do not leave estates that are subject to Inheritance Tax when they die.
Looking at the HMRC July 2024 publications, less than 5% of UK deaths in the 2021-22 tax year (06/04/2021 to 05/04/2022) resulted in an Inheritance Tax charge. This figure is broadly in line with the experience of the previous 20 years, where the percentage varied between 3% and 6%.
So for most people Inheritance Tax does not apply. Which is why it is strange that it is such an emotive subject for so many people.
The main reasons why most estates are not subject to IHT is that transfers between spouses are exempt and there are a range of allowances, including for leaving your house to children or grandchildren.
Yes, the single person allowance (Nil Rate Band – “NRB”) is only £325,000 however, the reality is that most estates benefit from a lot more than that.
Firstly, the NRB can be transferred from husband to wife or vice versa when one of a married couple dies, and the same applies for civil partners. That means for married couples and civil partners the allowance can be viewed as £650,000 rather than £325,000. Granted this isn’t great for non-married couples but there will always be people who fall between the gaps of any tax regulation.
Secondly, if you leave your main residence to children, grandchildren or other direct descendants, including adopted or step-children for example, there is an additional £175,000 allowance each available. Since this is transferable in the same way that the NRB is, for a large portion of the UK population the effective allowance is £1,000,000.
So when somebody tells you that your children will have to sell the family home to pay Inheritance Tax, it may be that this is true. However, it is far more likely that the family home will be sold because none of your children want to live there, or the one who does isn’t prepared to buy out the others.
Inheritance Tax is just a Tax
I appreciate that this may not seem like much of a point however, it’s probably the most important of these three points.
Too often Inheritance Tax is automatically assumed to be a problem to which a solution is required. However, it isn’t. Whether it is a problem that needs a solution is something that needs discussion and thought because invariably any solution comes with a compromise or a cost.
One easy way to reduce any eventual Inheritance Tax bill is to spend your assets or give them away. Give away everything above £1,000,000 as a married couple and (subject to living long enough after the gifts) you’ve solved the problem. The compromise comes in making sure that you are confident that you will never need what you have given away. Your assets need to support you first and foremost and I suspect you’ll find your children very much in agreement with that if you ask them.
You could look to use some of the other exemptions available such as Agricultural or Business Property reliefs. However if you don’t already own assets that qualify for these then investing into assets that do benefit from these reliefs will invariably involve compromises in terms of accessibility, risk and complexity.
Gifting to a Trust is often used to produce a compromise over straightforward gifting. Loan Trusts for example retain accessibility but compromise on tax reduction, whereas Discounted Gift Trusts can be great for tax reduction but compromise on accessibility.
The biggest compromise of the lot is taking out a Whole of Life, life assurance policy to provide money to pay a potential IHT bill. There’s no reduction in tax, but instead a lifetime commitment to paying premiums for a life assurance policy, to essentially reimburse your children for the tax that may have to be paid, without any certainty of what that tax liability will be or when it will be due.
So before jumping into planning to reduce your Inheritance Tax, you need to decide if it really is a problem that requires a solution and how much of a compromise you are prepared to make to try and solve it, or is it just a Tax that may or may not have to be paid after you’ve died.
The Financial Conduct Authority (“FCA”) does not regulate Inheritance Tax planning or Trust advice
