Prepare for any changes in inheritance tax
Although it only affects 4% of deaths in the UK, Inheritance tax (IHT) is probably the most hated tax of all.
This unwillingness, however, is easy to understand when you consider that the IHT is technically double taxation, as it applies to a person’s wealth even if they have already paid tax on their income during of his life.
Add to this the fact that some of those affected by IHT will receive hefty bills that they will struggle to pay with cash. This means they have to make tough decisions about how to pay. This could mean selling the family home, making it easy to empathize with those affected.
What is Inheritance tax?
Before we talk about the changes to the IHT, let’s first explore what the IHT is and how it applies.
In short, it is a tax that is applicable when transferring assets upon the death of a person. It can be property, possessions or money.
It is billed at 40% of the estate, but there is a tax-free allowance of up to £ 325,000 – known as the Zero Rate Band (NRB).
To use a practical example, an estate worth £ 1million would generate a tax liability of £ 270,000, assuming there are no other reliefs or allowances available. If the estate consists primarily of property or possessions, rather than money, it is more difficult for the family to pay, as many are forced to sell part of their inherited property.
Certain strategies are available to help reduce the size of an estate or reduce the level of assets exposed to IHT, in order to limit tax liabilities in the event of death. It should also be noted that if all of the above the NRB is left to a spouse, civil partner, charity, or community amateur athletic club, the IHT will not apply.
What could change?
Before the pandemic, changes to the law allowed people to pass on assets through donations, subject to certain specific conditions.
The Office for Budget Responsibility predicted that the Covid-19 pandemic could lead to a 20% increase in the number of families facing IHT bills, as many deaths were sudden and unexpected, leaving people with little or no time to organize their succession.
Another factor affecting the IHT is rising house prices, as the more a property’s value increases, the more likely it is to exceed the NRB.
The Spring Budget has already made changes to IHT. Chancellor Rishi Sunak has announced that current thresholds will be frozen until at least 2025/2026, which will only increase the number of people responsible for the IHT as asset values rise.
Treasury figures also confirm this and an additional £ 1bn is expected to be raised through IHT.
Additionally, the Organization for Economic Co-operation and Development (OECD) has recommended its 37 member states to increase the IHT to help economies recover from the high level of public spending seen during the pandemic.
So, as the autumn budget approaches, it is expected that the Chancellor will target the number of IHT exemptions available, including the annual £ 3,000 exemption and the possibility of donating excess income, to help generate additional income for the economy.
How should you prepare?
The first thing to do is to work with an accountant, or a specialist tax advisor, to calculate the size of your estate and what part of it is currently subject to the IHT. Without knowing it first, it is impossible to know what to do.
An advisor familiar with IHT will have an in-depth knowledge of the current rules and will be able to plan retirement and inheritance based on them, taking into account potential changes in exemptions and rising house prices.
To learn more about inheritance tax or get advice, visit the Wellers website website
Ercan Demiralay is a partner at Wellers