The UK economy looks as though it is coming out of the pandemic slump.
But although the furlough scheme, business loans and the NHS were all money well spent, there is a very large Covid 19 bill to pay, and as taxpayers, we will be paying it.
Chancellor Rishi Sunak cannot risk choking off the recovery with new tax burdens – but he will be looking very carefully at making the most of existing taxes, and it looks as though Inheritance Tax will be one of them.
At Continuum we are looking at what this might mean and what you can do about it.
The IHT timebomb
Death duty has been around in one form or another for a century or more. It used to affect the landed gentry, who might sell off a farm or two or put an old master up for auction.
But in recent years inheritance tax has gone mainstream, affecting ordinary people.
Receipts from Inheritance Tax, also known as IHT or more emotively death duty are soaring, for two simple reasons. The pandemic has pushed up the rate at which people die and because soaring asset prices, chiefly homes mean more and more families are caught in its net.
Figures released this month showed revenues collected from inheritance tax rose by 22% between April and September this year. In its release, HMRC tactfully refers to a “higher volume of wealth transfers during the Covid-19 pandemic”, or put bluntly, a lot more old people died than usual.
Over those six months, the Treasury collected more than £3bn from bereaved families – far more than expected. It is about to rise a lot more over the next few years.
IHT can make substantial holes in the wealth we leave to our loved ones. It is of course levied on our estates; the property, money and possessions we have spent a lifetime accumulating and the threshold is just £325,000. Go past that figure, which many of us will do thanks to high property prices and large pension pots and the taxman can help himself to 40% of everything we leave behind – although there are some concessions which might let you pass on a family home.
The Office for Budget Responsibility forecasts that revenues from death duties will double by 2026. Very soon, just owning an average house will mean your heirs are taxed at 40% on whatever you have to leave to them.
IHT has started to turn into a mainstream tax like VAT or fuel duty that we all have to pay.
Defusing the timebomb
The treasury’s mountain of debt means that there is little chance that IHT will be eased, no matter how iniquitous it becomes. However, there are ways to reduce its impact on your loved ones.
- Gifting your wealth to your beneficiaries while you are still alive. Potentially Exempt Transfers (PETs) allow you to give money away as long as you live for seven years.
- Taking out a whole of life insurance policy which could provide a large sum payable on your death which your executors can use to cover your IHT liability.
- Setting up a trust, putting your cash, property or investments to someone else so they can look after them for the benefit of your beneficiaries and where the taxman will simply not be able to touch them.
With proper planning it may still be possible to reduce or eliminate an IHT burden on your beneficiaries, but it is you, rather than those beneficiaries who need to act now.
These are only some of the possible solutions. At Continuum we can work with you to find the answers that are right for you with professional succession planning.
We can help you ensure your loved ones receive your wealth, not the taxman.
The information contained in this article is based on the opinion of Continuum and understanding of current HMRC tax rules and does not constitute financial advice or a recommendation to suitable tax mitigation strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
The levels. bases and reliefs from taxation depend on individual circumstances and may be subject to change. The Financial Conduct Authority does not regulate taxation & trust advice and will writing.