What is going to happen to Inheritance Tax?

Inheritance tax, or IHT, is the tax we never have to pay.
However, although we do not pay it ourselves, it can take a chunk out of what our loved ones receive -ย because it is levied on the property, money and possessions we want to leave them. At 40% of everything past the ยฃ325,000 IHT threshold (tax year 2020/2021), it can be a very large chunk.
IHT was originally a tax on only the very wealthiest estates. But increasing house prices pushing up peopleโs net wealth has meant that many more people are now caught by it.
We canโt take it with us, but most of us would prefer that our loved ones receive our wealth when we die, rather than the taxman.
Thereโs no Inheritance Tax to pay if the value of your estate is below ยฃ325,000.ย Go past that figure โ which is easy to do these days with high property prices and large pension pots - your estate becomes taxable. If you donโt take the right precautions, the taxman will help himself to 40% of everything above the threshold.
During the 2018-19 tax year, HM Revenue & Customs collected a record ยฃ5.4 billion marking a 3% rise, around ยฃ166 million on the previous year
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A fall in revenue
But there is some good news. The introduction of the Residence Nil Rate Band in April 2017, by former Chancellor George Osborne in 2017-18 meant that the full value of the family home might not count against IHT liabilities. RNRB applies where the deceased left a residence, or the sale proceeds of a residence, to their direct descendants.
This meant that people would not need to sell a family home to pay IHT, and properly used, gives married couples and civil partnerships a maximum joint estate of ยฃ1m before IHT comes into effect.
The RNRB for 2020/21 is ยฃ175,000 an increase of ยฃ25,000 from 2019/20.
As a result, the amount HM Revenue & Customs received from Inheritance Tax fell in 2019/20 for the first time in 10 years. According to the tax authority, the main cause of the reduction in IHT take was the RNRB.
This is good news for those affected, who will be considerably better off as a result โ but there could be problems ahead.
The Exchequer has a shortfall
Receipts from VAT and income tax are down because of lockdown. This comes at a time when the cost of the government's coronavirus policies has risen to ยฃ132.5bn, according to the Office for Budget Responsibility.ย
The taxmanโs IHT revenues in 2019-20 wereย ยฃ5.2bn a ยฃ223m decrease on 2018-19.
HMRC has a shortfall to make up, and a falling IHT might become a target for new tax-gathering measures. It would be no surprise to see George Osborne's IHT giveaway reversed as his successor, Rishi Sunak, seeks ways to raise much-needed cash to pay for the nation's eye watering Covid-19 debts. No announcements have been made โ but it might be prudent to look at your estate planning arrangements now.
What is estate planning?
Estate planning, also known as inheritance tax planning, involves arranging your affairs to limit IHT losses. Many factors need to be taken into account. These include the size of your estate, your current health, whether you can afford to give some cash or assets away, and what you might need in the future.
You need to look at your family. You can give anything you want to your spouse, be they married to you or a civil partner, free of tax for their lifetime.ย So your widow or widower should be safe in the home you have shared.ย You may need to think about gifts, and putting your wealth into trust, or taking out insurance which could pay off your IHT liability.
The rules are complex and getting professional advice on tax and estate planning is essential. Not only does it make sure your wishes are respected, it can provide peace of mind that your heirs can inherit your estate in the most tax-efficient manner. You need expertise not just in tax โ but in understanding your overall financial position to ensure that you have measures in place which will keep your wealth safe from the taxman โ but still allow you to enjoy the lifestyle you need now.
Call us
To arrange a personal appointment with a Continuum expert to discuss your financial arrangements via video, call us today.
At Continuum we have the expertise you need. It might be a good time to call us, and start getting to work to minimise your IHT obligations.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable inheritance tax planning strategy, you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate taxation & trust advice and will writing
https://news.sky.com/story/coronavirus-cost-of-covid-19-response-rises-to-132-5bn-obr-12000457
https://www.ftadviser.com/pensions/2020/07/30/iht-receipts-fall-first-time-in-decade-as-rnrb-bites/
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