Inheritance Tax (IHT)
The Final Tax
As ‘Death Cover’ became ‘Life Cover’ so ‘Death Duty’ became ‘Inheritance Tax’.
Taxing individuals on death has always been controversial and unpopular. However, for governments it is inexpensive to administer and simple to collect. Tax collectors are also helped by general inertia amongst the general public to plan for this eventuality.
The UK is a property hot spot with high levels of ownership and capital values that, until recently, seemed to just keep on rising. This has meant that many who would not have considered themselves wealthy are now being caught by a tax that they thought only affected the very rich.
Who is liable for IHT?
Individuals are liable to pay IHT when they consider, or are adjudged, that the UK is their homeland or “domicile”. The issue of domicile can be very complicated; normally a person acquires their domicility from their father at birth. If any individual remains in the UK for a period of 17 out of 20 years, that person will be “deemed domicile” and face IHT as if the UK had always been their domicile from birth. See HMRC guide: https://www.hmrc.gov.uk/cnr/hmrc6.pdf
What is liable for IHT?
Perhaps confusingly, it is possible to be charged IHT whilst you are alive as well as on death. For most people though, they, or rather their beneficiaries, face the prospect of an IHT bill on death. Broadly speaking, there is little that escapes IHT on death. An individual’s taxable estate includes the sum of all of their assets less their liabilities.
Example 1:
| Assets | value |
| Family Home | £500,000 |
| ISA portfolio | £30,000 |
| Bank accounts | £20,000 |
| Shares | £10,000 |
| Premium Bonds | £5,000 |
| Liabilities | value |
| Mortgage | £150,000 |
| Unsecured loan | £7,500 |
| Kitchen finance | £2,500 |
| Gross Estate | £565,000 |
| Less liabilities | (£160,000) |
| Net Estate | £405,000 |
Also included in this figure could be past gifts someone has made to another individual or a trust, and business property.
Reliefs, Allowances and Exemptions
The nil-rate band
Those liable for IHT have a band in which their estate is not liable for IHT; this band is known as the nil-rate band. Where an individual’s net estate falls within this band no IHT is due on that person’s estate. The current nil-rate band is £325,000 (tax year 12/13). Where an individual’s estate exceeds £325,000 tax is due at 40% on the surplus.
Example 1A:
| Gross Estate | £565,000 |
| Less liabilities | (£160,000) |
| Net Estate | £405,000 |
| Nil Rate Band | £325,000 |
| Taxable Surplus | £80,000 |
| Tax Due | £32,000 |
Exempt gifts
Some gifts or transfers made by an individual during life and/or at death escape IHT entirely:
- Transfer between spouses and civil partners are exempt from IHT (limited to £55,000 where the receiving spouse is not UK domiciled)
- Lifetime gifts of £3,000 per tax year gifted to another individual are exempt
- Lifetime gifts of £250 per tax year gifted to any number of individuals are exempt
- Habitual transfers made from normal expenditure is exempt
- Gifts on marriage (various limits apply)
- Gifts for education and maintenance
- Gifts to charities and political parties
- Gifts for the national benefit
Reliefs
Individual can benefit from one of the IHT reliefs that exist to reduce the burden of IHT, some examples of these are:
- Business property relief – qualifying businesses can pass down through the generations without facing IHT.
- Agricultural property relief – qualifying agricultural businesses can pass down through the generations without facing IHT.
How to Plan for IHT
There is no one size fits all solution for IHT planning. As with all planning, it is first vital to understand the outcome of doing nothing. Some clients have a nonchalant view about IHT and don’t see it as their problem; others see it differently and resent their wealth being taxed even further when they are gone. As with any well laid plan, it is also vital to allow enough room to adapt should a situation change.
There are a huge number of options available when looking to mitigate IHT, four possible basic strategies are outlined below:
1. GIFTING – small gifts can be exempt immediately, larger gifts can be exempt after 7yrs.
2. INVESTMENT – in an asset or trust structure that will provide exemption or relief after a given timeframe.
3. EQUITY RELEASE – often the main residence pushes individuals above the nil-rate band; by selling or creating debt against the property, this in turn can reduce the taxable estate.
4. INSURANCE –calculate the estimated tax due on death and then use a life policy written into a suitable trust to create a lump sum for the beneficiaries to draw on to settle the bill
All approaches have their advantages and drawbacks. Based on an individual’s circumstances, we would design a bespoke plan that would typically involve a sensible mixture of strategies. The appropriate solution or solutions will be based on personal circumstances such as age, health, marital status, whether there are children or grandchildren, current wealth, liquidity requirements and the potential for future income, capital and expenditure.
Summary
Inheritance Tax is an emotive issue for many people; care needs to be taken to ensure that an individual does not become impoverished just to avoid tax that may be due in a week or twenty years time. It is vital to seek suitable independent financial and legal advice before deciding on any given strategy.