Planners poring over charts

Looking out for your loved ones

There’s clearly no love lost when it comes to Inheritance Tax. It’s often described as the UK’s most hated tax, arising from a sense of injustice that a sizeable chunk of assets you may have taken many years to accumulate could end up in the taxman’s pocket instead of your loved ones’ own.

There’s clearly no love lost when it comes to Inheritance Tax. It’s often described as the UK’s most hated tax, arising from a sense of injustice that a sizeable chunk of assets you may have taken many years to accumulate could end up in the taxman’s pocket instead of your loved ones’ own. It is estimated that £5.5 trillion in wealth will be passed down to younger generations over the next 30 years1.

The Voluntary Tax

The good news is that inheritance tax is much easier to mitigate than many other taxes. In 1986 Roy Jenkins, a former chancellor, famously described Capital Transfer Tax (Inheritance tax’s predecessor) as “a voluntary levy paid by those who distrust their heirs more than they like the Inland Revenue”.

The current rate of inheritance tax is 40%, payable on net estate assets above an individual’s nil-rate band, currently set at £325,000. So, if an individual dies with an estate worth £500,000, beneficiaries could be hit with a tax bill of £70,000 (£500,000 – £325,000 =
£175,000 x 40%).

If you are married or have a civil partner and/or own your own home, your effective nil-rate band could be significantly higher than £325,000 in practice. The residence nil-rate band can add a further £175,000 for each individual and given nil-rate bands can transfer to surviving spouses or civil partners on death, your joint nil-rate band could be as much as £1million.

Changes Afoot?

Whether the current regime will remain in its current form is another matter.

In January 2020 a group of MPs published a report recommending radical changes to the inheritance tax landscape. And a recent survey found that, due to government bailouts to help businesses survive the coronavirus pandemic, around eight out of ten people now thought rises in inheritance tax were at least somewhat likely2.

It is the lack of change for a long time that’s caused more and more people to trip into the inheritance tax liability zone. The basic nil-rate band has remained frozen for more than a decade, despite house prices and investment markets increasing significantly. From 2009 to 2019 the government’s inheritance tax receipts rose year-on-year, with the figure of £5.36billion in 2019 more than double the £2.4billion paid 10 years earlier. Receipts fell slightly in the 2019/20 tax year as the newer residence nil-rate band started to have an impact but are still at well over £5billion.

However, inheritance tax receipts pale in comparison to the amount being passed down. Research in 2019 found £17billion (almost £70,000 per estate) in cash being left to beneficiaries each year, with £10billion passed down in investments such as stocks, shares, and bonds. Property, meanwhile, accounts for more than half of the total wealth handed down at £43billion3.

The bigger Picture

Although it’s the tax saving part that often motivates people to make a start with estate planning, there’s much more to it than that.

A more accurate description of the task – when done well and with your whole family in mind – is striking the right balance for you between passing wealth tax-efficiently to younger generations at a time when they need it most and still supporting your own preferred lifestyle in later life. There’s a lot to think about and it’s a balance that can be tricky to achieve in practice without expert help.

Are your plans in shape?

  • Have you made a will? If yes, when was the last time it was reviewed?
  • Did you seek professional advice when making your will?
  • What is the total value of your estate? Does this make your beneficiaries potentially liable to inheritance tax? When was the last time you sought advice in this area?
  • Have you made or are you considering any big financial gifts during your lifetime? Do you understand the potential tax implications of those?
  • Are you looking to pass down a business? If yes, have you assessed the potential tax implications and tax reliefs available to you?

Getting the support you need

If you are concerned about a potential inheritance tax bill or just want to make sure your future estate (your overall wealth) is being managed in the most efficient way, professional help is available and often worthwhile given some of the dizzying complexities involved.

At IWP Principal we have years of experience helping families implement estate planning strategies putting more in the pockets of loved ones. We also have links to solicitors, accountants, and other experts you may need to put your strategy into practice.

One of our expert planners would be more than happy to arrange a meeting to explore how we might help you achieve peace of mind that those important to you will be taken care of.

1Kings Court Trust – Discover more about intergenerational wealth transfers

23FT Adviser – Savers turn to planning as IHT hike expected – 27 July 2020

3EQ – Over £17 billion left behind in cash each year after death – 1 October 2019