Inheritance Tax (IHT) payments rose 8% in 2017, leading to HMRC revenue from the tax surpassing £5billion, for the first time ever. It is no surprise therefore that Inheritance Tax is unofficially dubbed Britain’s most hated tax.
But this is also somewhat surprising as, in reality, very few estates are actually liable to this tax. According to the latest HMRC resource fewer than 25,000 estates were liable to IHT in 2015/16, representing just over 4% of the total deaths in that year. Furthermore, most people, such as married couples, are able to leave up to £850,000 in assests to their direct descendants tax free, with this figure looking to rise to £1million by 2020.
So where is all this hate coming from? There are some key categories of people who are most likely to fall foul of IHT and therefore, they and/or their families are the most likely to be feeling such discontent over a tax that, in fact, affects so few.
Recent reports have shown that, so called, baby boomers, will leave behind record inheritance to today’s younger generation. In many cases they very much under-estimate the value of their estate, for example, not recognising the significant hike in the value of their property over the years. This is especially the case if they are still settled in what was their first family home, a large property in leafy suburbia. With cash in the bank and property worth way more than they ever would have paid for it, the families they leave behind, will lose out greatly to IHT.
Blended families, where a remarriage has occurred between two people already with children of their own, can often be the cause of financial “conflicts of interest”. Often financial decisions can simply be too complicated to make and as a result good financial planning falls by the wayside. Without good planning during your lifetime it is all too likely that unnecessary IHT liabilities will arise.
Skiers (people “spending kids’ inheritance”)
A survey carried out in 2017 showed that 56% of people wanted to spend their money whilst alive, rather than pass it on to their children. Of course. this is everyone’s right and a great idea when you are fit, well and can still travel independently or maintain your new hobbies. However, once health starts to diminish there is a strong likelihood of accumulating wealth again. Skiers can often be reluctant to gift money whilst they are still alive, as they hope to be able to use it for their own pleasure in the future. But if, for example, their health doesn’t get better (but they still live a long time) they are simply left with a large estate and the accompanying IHT liabilities.
Stranded property millionaires
All too often this category of IHT payers is simply “stranded” in an expensive property in an expensive area, where they will see their life out. Unfortunately, it is no longer possible to offer IHT planning on a private residence, without jumping through many hurdles and consequentially an IHT bill will arise because they cannot give their wealth (the property) away!.
Forget the kids – it’s all mine!
A former conservative chancellor said that the only people to suffer IHT are those who trust their children less than HMRC! There is an element of truth in this and when the situation arises, the IHT bill is somewhat of a message from the grave – a “final goodbye” from the parents or relatives saying, “If you’d have looked after me better this could have all been yours!” It is an unpleasant situation but one that is regularly seen.
Despite being a levy on a very small minority of the UK taxpayers, IHT will continue to impact many families for a variety of different reasons. In April the Independent Office of Tax Simplification (OTS) published a call for evidence and an on-line survey to gather information about people’s experience and perceptions of Inheritance Tax. Will the findings provide significant changes? Most likely not. IHT has been “tinkered” with over recent years but as yet, no huge changes have been made. When it comes down to it, all that anyone can do is plan for their future and their death, during their lifetime.
If you would like more information about financial planning and Inheritance Tax please contact Nigel Shaw.