Inheritance Tax Revisited
MoneyWise Autumn 2006
If you think inheritance tax does not apply to you, you should probably think again. The inheritance tax (IHT) net is extending rapidly. The total number of estates paying this tax rose by nearly three-quarters over the five years to 2003/04, according to research recently undertaken by the Halifax. (HBOS plc press release 5/8/2006) The research was based on data from HM Revenue & Customs (HMRC) and also shows that the government expects the number of estates paying the tax to rise by a fifth by the end of 2006/07. What is more, over the past five years IHT revenue has leapt by nearly 50%.
And you do not need to be rich to be hit by IHT: membership of the IHT ‘club’ is far from exclusive. One of the more surprising results from the Halifax’s mining of the HMRC statistics is that in 2003/04, more than seven out of ten estates suffering IHT were worth less than £500,000.
So what is driving this IHT bonanza for the government? It is a combination of two factors: rising house (and other asset) values coupled with a tax threshold that increases very slowly each year – in 2006/07, tax at 40% is charged on estates (including homes) to the extent that they exceed a mere £285,000.
The Halifax calls on the government to raise the inheritance tax threshold to £430,000 to allow for the increase in property prices over the past ten years. The trouble is that there is very little chance of this happening, despite a former cabinet minister calling for the abolition of IHT.
- In this year’s Budget, Mr Brown announced the levels of the nil rate band threshold right through to 5 April 2010 – by which time it is due to be just £325,000. The aim of this ploy was to kick the issue into the long grass until after the next election.
- What is more, the Treasury shows every sign of needing all the revenue it can raise: it simply does not seem to be in the business of cutting your taxes. IHT currently yields over £3 billion a year – and rising.
If anything, the Chancellor seems intent on widening the scope for IHT, judging by the moves in the last Budget to counter the use of trusts. The new rules are now in place, and generally took effect from Budget day (22 March 2006). They have complicated IHT planning in some areas, particularly for very large lifetime gifts, but many strategies remain that could allow you to make transfers out of your taxable estate and still give you a high degree of access to the funds.
The changes mean that you should review your estate planning soon and regularly. It is not just your circumstances that change: the law is constantly evolving – sometimes suddenly and unexpectedly. Many of the standard approaches to planning are no longer appropriate and should be amended as a matter of urgency. It is especially important to review your will, as well as any trusts with which you may be involved. Levels of, bases of and reliefs from taxation are subject to change and their value depends on individual circumstances.
