According to a recent article by This is Money, Inheritance Tax (IHT) is Britain’s most hated tax, yet only 4% of people actually pay it. Is this feeling justified, when the IHT paid in 2020/21 amounted to just £5.3billion? Compare this to fuel duty tax and income tax which brought in approximately £20.9billion (with the caveat that fuel consumption dropped dramatically during the coronavirus pandemic) and £198billion respectively in the same year for the government.
A commonly stated objection to IHT is that it amounts to double taxation. Your income is potentially being taxed twice, first through income tax and then again on death through the charge to IHT (and potentially again for a third time, through Capital Gains Tax on disposals at a gain during your lifetime). The knock on effect being that wealth is taken away from your family on multiple occasions before they inherit from your estate. Whilst only 4% of estates are currently being taxed on death, warnings continue to grow over the impact of house prices on the value of personal estates, when the allowances for IHT have not increased for over a decade, save for the introduction of the Residence Nil Rate Band (RNRB) in 2017.
It is possible to mitigate IHT through estate planning. IHT is charged at 40% of your estate, after the deduction of available allowances and exemptions. Broadly speaking, there is a tax-free allowance of £325,000, the Nil Rate Band. No IHT is due if your estate is worth less than this amount and where you are widowed and your spouse / civil partner left their estate to you on first death, your estate can benefit from their unused allowance. The Nil Rate Band will be frozen at £325,000 until 2026, allowing the potential for property prices to continue rising, and the amount of people whose estates fall within the realm of IHT increasing, and for those whose estates are already within the realm of IHT, creating a higher IHT bill on death. The RNRB sought to increase IHT allowances to £1million, if you leave your residence to your direct descendants. Childless individuals do not benefit from the increase allowance, currently £175,000 for qualifying individuals.
So, whilst IHT may be the most hated tax, with the economy bouncing back after the pandemic, and property rises on the increase (particularly after the recent Stamp Duty holiday), IHT is likely to become more hated as more and more people will see an increased IHT bill on death due to a freeze on IHT allowances until 2026 and assets increasing in value. Following the budget, with IHT not mentioned, now is the perfect opportunity to review your financial position and take action to ensure that you have taken advantage of all the tax reliefs and exemptions that are currently available before further changes are on the horizon.
For further advice in relation to tax planning please contact Amy Lane, Associate, on 01892 701366 or by email at email@example.com.