Inheritance Tax (IHT) must be a good candidate for the most loathed tax in the UK. Like its predecessor Capital Transfer Tax, IHT was originally designed to hit the very wealthy. But this situation has changed markedly. It’s now more likely to be the middle classes rather than high net worth individuals who end up paying IHT. The reason for that is twofold: escalating property values and an IHT threshold that has failed to keep pace with them.
From April 2017 the total IHT threshold, will rise from £325,000 per individual to £425,000, it will then continue to increase to £450,000 in tax year 2018/2019, rising the following year to £475,000, with an allowance of £500,000 available in tax year 2020 to 2021. The allowance will then increase in line with Consumer Prices Index (CPI) from 2021 to 2022 onwards. This means that married couples and civil partners will be able to pass on assets worth up to £1m, including a family home, without paying any IHT at all. On death, IHT is payable at 40% on the value of an estate above the threshold, if the estate doesn’t pass to the deceased’s spouse or civil partner. Unpaid utility bills and funeral expenses can be deducted from the value of the estate.
In 1986, the year IHT was introduced, the threshold was £71,000. In that same year, though, the average UK house cost less than £40,000; and as everyone knows, property prices have rocketed since the 1980s. According to the Land Registry, the average property price in the UK was £186,350 in October 2015, and many houses are worth far more than this. It wouldn’t be surprising if the value of your house alone exceeded the IHT threshold, let alone all your other savings, shares, cars and assets given away up to seven years before death, all of which comprise your estate.
Despite the fear in which it’s widely held, however, the vast majority of estates (over 90%) are not liable to IHT at the moment and therefore would not benefit. (Institute for fiscal studies 2015). This is partly due to many estates failing to reach the IHT threshold value; partly to various exemptions available; and partly due to various legal means of avoiding IHT.
Exemptions include:
IHT spouse relief: a new £175,000 per person transferable allowance for main residences when they are passed to children or grandchildren. For many couples this will give a total allowance from April 2020 of £1 million (£325,000 plus £175,000 each). This new allowance will be tapered away from those leaving more than £2 million with the intention that those leaving more than £2.35m will not benefit from the new allowance.
Gifts to spouses and civil partners.
Tax-free bequests: you can leave money in your will to charities, political parties and some institutions such as museums with no IHT tax liability.
Annual gifts: you can give up to £3,000 to family and friends each year tax free, as are small gifts to anyone of up to £250 and wedding gifts to friends and family up to £5,000 (for parents), £2,500 (for other relatives) and £1,000 (for everyone else).
Potentially exempt transfers: these are free of tax if made over seven years before death but form part of the estate if not. They include certain trusts.
The rules governing IHT are complex, however with sound financial advice your IHT liability can often be greatly reduced or even eliminated. It is particularly worth taking advice earlier rather than later. Please get in touch with our financial planning team, where the first meeting will be at our expense.