"Nothing can be said to be certain except death and taxes"
Earlier this year the Office of Tax Simplification recommended an overhaul of the Inheritance Tax ("IHT") regime, seeking to make it simpler, more intuitive and easier to operate. However, at a conference last week, Chancellor of the Exchequer, Sajid Javid alluded to the possibility of scrapping IHT entirely – a suggestion which has since been echoed by other government ministers.
In anticipation of Javid's first Budget, which could take place by the end of this month, we will take a look at the current IHT regime and what you can do to protect your assets.
What is Inheritance Tax and how is it applied?
IHT is a 'wealth' tax and has been applied since 1986. When someone dies leaving an estate exceeding the Nil Rate Band ("NRB"), IHT will be charged on the surplus above the NRB at the rate of 40%.
For a married couple, there is an exemption for assets which pass from one spouse to the other either during life or on death. Spouses are also able to make use of each other's NRB on the death of the survivor meaning that £650,000 of their joint estate can pass free of IHT.
In recent years there have been various reforms to IHT, most notably, the introduction of an allowance known as the Residence Nil Rate Band ("RNRB"). Subject to certain conditions, RNRB allows individuals to leave their house to children or grandchildren free, or partially free, from IHT. The threshold allowance has increased incrementally since its introduction in April 2017 and will reach its maximum of £175,000 by April 2020.
Will Inheritance Tax change in the future?
IHT has frequently come under scrutiny and has been a focus of political differences since its controversial introduction. Whilst some individuals view IHT as a way of reversing austerity, many others, view the tax as fundamentally unfair.
Javid stated, "I do think that when people have paid taxes already through work, or through investments and capital gains and other taxes, that there's a real issue with asking them on that income to pay taxes all over again".
The NRB threshold stagnated in 2009, resulting in a regime which has failed to keep pace with inflation and rising property prices. This has resulted in more estates exceeding the threshold level and therefore liable to IHT.
It is uncertain what changes are on the horizon for IHT and whilst you may think that IHT is not something you need to worry about, review of your circumstances and obtaining professional advice should be considered on an ongoing basis as early action can significantly reduce tax liability.
Can I avoid paying Inheritance Tax?
With careful lifetime planning, it is possible to mitigate the tax which may become due on your estate.
As a starting point it is important to make a Will to ensure that your estate goes to the person, or people, you want to receive it. It also allows a person with a large estate to engage in IHT planning to cut the tax bill or avoid paying it altogether. Even if you have already prepared a Will, it is worth reviewing it to ensure you make the most of the tax allowances available.
Other estate planning options include making lifetime gifts, or placing money or property in trust. IHT reliefs are also available, including Agricultural Property Relief and Business Property Relief.
No two clients will be the same or make the same choices and therefore if you would like to obtain estate planning advice tailored to your specific needs and circumstances, our experienced team of solicitors are on hand to help.
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