By Graham Poles, tax partner, Armstrong Watson
Ahead of the Autumn Statement next month, the ongoing debate about the future of Inheritance Tax (IHT) continues.
While it is unlikely the 40 per cent tax charge – regarded as ‘Britain’s most hated tax’ – will be abolished anytime soon, it’s likely manifestos will promise another review, and perhaps simplification of IHT.
The problem is, IHT is a complex tax – although a tax that can be mitigated by planning in advance. Many people are aware that they can give away assets, so they are not in your estate when you die, but what they don’t realise is the consequences of such gifts.
Firstly, the benefactor must survive the gift by seven years, otherwise it is added back anyway.
Secondly, if for example, a couple want to transfer the family home to their children – which is a common question – this changes the legal ownership, but may not remove the IHT charge.
This is because unless you continue to pay a market value rent for living in what was your home, then the property remains in your estate, because of anti-avoidance legislation.
My recommendation would be to increase the nil rate band (NRB), which has not increased since 2009, by all of the inflationary increases that have been ignored, giving estates a larger tax-free amount. I understand that if it had increased by CPI, it would now be worth £465,000, or 930,000 for a married couple or civil partnership.
Even the addition of the residence nil rate band (RNRB), whilst helping many families, is shrouded in complexity depending on who you leave your main residence to in your will.
The relief itself is also capped at £175,000 per person until April 2028, whereas as it would now be worth about £216,000 if it had followed UK average house price inflation.
The estates of many individuals have increased significantly as a result of rising property prices, an asset where the value is very difficult to realise unless you choose to downsize, which many older people are reluctant to do.
This leaves families having to sell the family home to meet this tax liability. Whereas, if they simply increased the allowances, as suggested above, most estates would not be subject to tax having total allowances of over £1.35 million.
If the Government does decide on a consultation then it must be one looks at the reason for the tax, making it fair across taxpayers and those striving to grow businesses, and stripping away complexity wherever possible, leaving a tax that is fit for purpose.
For anyone who is looking for advice and guidance about IHT and how this could impact you, then please do not hesitate to get in touch by emailing help@armstrongwatson.co.uk and arranging an informal chat with one of our experienced tax advisers.
