The rules and regulations around inheritance tax (IHT) may be fiendishly complicated, complicated and, in the event you’re not cautious, expensive.
And whereas there are rumours Rishi Sunak is cutting or reforming IHT, this levy will possible stay a problem for taxpayers for years to return.
IHT wins no prizes for being the UK’s least favorite tax, based on a 2019 Hargreaves Lansdown survey, owing to the concept it saps away at folks’s hard-earned wealth after they’ve handed, no matter how a lot they could be abandoning.
The tax is levied at a fee of 40% on estates worth more than £325,000. On high of this, the federal government launched the “predominant residence nil-rate band” in 2017, exempting all or a part of the worth of the household dwelling from IHT offered the beneficiary is a baby or grandchild.
So, there are methods to decrease your IHT tax invoice and having a greater understanding of the nuances of the levy, in addition to who pays it might assist you to keep away from some potential pitfalls.
Listed here are six frequent IHT myths, debunked by consultants, to assist prevent cash.
It raises a big sum of money for the federal government
Regardless of it being one of the contentious taxes, the general sum of cash generated from IHT for the Treasury is comparatively small compared to different tax levies.
Final 12 months, IHT raised simply £6.4bn – lower than each tobacco responsibility (£9bn) and alcohol responsibility (£12bn).
Niki Patel, tax & belief specialist at St.James’s Place says: “In newer years, there was a rise in IHT receipts nonetheless, even with this being the case, compared to different taxes, for instance, revenue tax, nationwide insurance coverage, capital positive aspects tax, company tax and VAT, IHT doesn’t at the moment elevate important quantities for the federal government.”
The explanation for the final improve in receipts, based on Patel, is fiscal drag. The IHT tax threshold (or nil fee band) has been held at £325,000 because the 2009/2010 tax 12 months, whereas asset costs, notably home costs have continued to rise. This has dragged increasingly more folks into the IHT internet.
Solely the very rich pay inheritance tax
Round 3.76% of deaths within the 2019 / 2020 tax 12 months resulted in an IHT cost, however, as Alex Hunt, authorized director in Birketts’ non-public consumer advisory staff notes, a few of us might find yourself within the 3.76% with out figuring out it.
“The common home worth within the UK in January 2022 was slightly below £300,000, though for some areas this determine is considerably larger. IHT can due to this fact apply to those that are merely well-off fairly than very rich,” Hunt explains.
In areas like London, which have seen important home worth appreciation over the previous three a long time, the danger of getting to pay IHT is even larger. “As a result of fee at which property values have elevated over the previous few a long time, many individuals who bought their properties 30 years in the past might now discover that their property exceed the IHT allowances,” explains Hunt.
A property may be gifted, which means no tax can be payable on it
For most individuals, their home is the largest asset they personal, which suggests it’s possible if any IHT is due, it’ll be on the worth of their predominant residence.
Whereas there are specific reliefs accessible for these passing on their predominant residence, it’s not at all times potential to go on a house with out having to pay IHT.
One approach to get round this difficulty is to go on a house earlier than it’s too late.
In apply, a property may be gifted to somebody tax-free, based on James Ward, head of personal shoppers at regulation agency Kingsley Napley.
“Nevertheless, if the particular person gifting dies inside seven years of creating the present the worth of the present can be added into their IHT calculation,” he says.
As well as, if the particular person gifting continues to derive a profit from the property then the worth of the property can be topic to IHT on the date-of-death worth.
“Different taxes might apply to a present of property, as an illustration, stamp responsibility land tax and capital positive aspects tax, so skilled recommendation is vital,” he provides.
To complicate issues, a property may be transferred between spouses or civil companions, however IHT will nonetheless be payable on the property on the dying of the second associate.
Check out our article on how to reduce your IHT bill by gifting.
IHT solely applies to property
There’s a preconception that IHT solely applies to property, and whereas a home might make up a good portion of the overall tax legal responsibility, virtually each asset inside an property is liable.
Birkett’s Hunt says; “IHT applies to virtually each asset with the accessible exemptions being very restricted. By means of two examples of how area of interest a lot of the outright exemptions are, medals awarded for “valour or gallant conduct” are exterior of the scope of IHT, as are warfare financial savings certificates.”
He explains there are a variety of reliefs that may apply to different lessons of property, akin to enterprise and agricultural property.
“These may be extraordinarily invaluable in lowering publicity to IHT. Nevertheless, the circumstances are strict and must be checked fastidiously if they’re to be relied upon,” he says
Property overseas will not be counted for UK IHT
If you happen to reside within the UK and are domiciled right here your complete property worldwide is probably taxable in your dying no matter the place it’s located.
Nigel Might, tax associate at Gravita says this contains vacation properties, overseas investments, and overseas financial institution accounts.
“The very fact that there’s a legal responsibility to dying duties abroad doesn’t imply that you don’t have any legal responsibility to UK tax, though usually there’s a ‘pecking order’ between nations. For instance, if there’s a legal responsibility to tax in Spain on a vacation dwelling located there, you can be given credit score for the Spanish tax paid, so that you simply don’t pay tax twice. The principles are completely different for people not domiciled within the UK,” he provides.
Everybody pays some type of IHT
One of many greatest myths round IHT is that everybody pays some type of the levy. However as we lined above, solely a small proportion of estates must pay.
That being mentioned, most estates should show to HMRC there’s no IHT to pay earlier than the distribution of property can start.
Nonetheless, in relation to paying the tax, “the fact is that hardly anybody pays it,” says Andrew Oury, associate at accountancy and authorized agency Oury Clark.
And the speed of tax paid is definitely decrease amongst bigger estates than it’s amongst smaller ones. HMRC knowledge reveals estates price £10m or extra paid a median of 10% in tax in 2015-16 – half the common 20% tax paid by estates price £2m to £3m. “The very rich keep away from it as does a lot of the remainder of the world,” provides Oury.
With that in thoughts, we’ve pulled collectively 4 methods you should use to try to decrease your IHT legal responsibility.
Find out how to decrease your inheritance tax invoice
The present IHT system permits as much as £175,000 of the household dwelling to be handed on tax-free, which is successfully doubled to £350,000 when mixed with the allowance of a partner or civil associate. On high of this, the £325,000 normal nil-rate band is accessible, which means it’s potential to go on £1m IHT free as a pair.
Shaun Moore, tax and monetary planning knowledgeable at Quilter says the band solely works for these “with direct descendants to inherit the household dwelling” and is capped on the worth of the property being inherited – much less any excellent mortgage.
It’s additionally potential to go on cash tax-free via pensions.
Gifting is likely one of the most typical methods folks keep away from IHT payments, owing to the variety of concessions and freebies accessible.
Moore says: “Items to spouses or civil companions are utterly freed from IHT and every tax 12 months up you’ll be able to present as much as £3,000 together with your annual exemption, in order a pair this could possibly be a mixed £6,000 a 12 months. As well as, there isn’t a restrict on extra revenue – above regular expenditure – that may be gifted.”
Giant presents, together with property, are classed as Doubtlessly Exempt Transfers (PETs) or Chargeable Lifetime Transfers (CLTs), and their worth won’t be counted as a part of the property upon dying, assuming the one who makes the present lives for an additional seven years.
Moore says such transfers may be “notably helpful for estates of greater than £2m” that are impacted by the RNRB taper because the presents can instantly reclaim the additional band.
One of many methods the very rich scale back their IHT liabilities is to put money into several types of property, akin to shares listed on AIM, farmland and personal companies. Investments beneath the Enterprise Funding Scheme (EIS) and Seed Enterprise Funding Scheme (SEIS) will also be IHT-free. Nevertheless, that is fairly a posh space, and these investments could also be unsuitable for many.