The amount paid in inheritance tax reached a record high last year, with £4.9billion being paid in the 2016/17 tax year. And according to data released last week, in the current 2017/18 tax year, inheritance tax receipts have already increased by a further 22%.
We all recognise that death and taxes are inevitable, but inheritance tax has been called the ‘avoidable tax’ or the ‘voluntary tax’ as with some careful inheritance tax planning there are many ways to avoid it or at least reduce it significantly.
Whilst the threshold for inheritance tax (IHT) has been pegged at £325,000 since 2009 and whilst house price rises have exacerbated the IHT problem, exposing more people to IHT at the 40% tax rate, the new ‘family home allowance’ now helps each individual homeowner by allowing them to pass on a further £100,000 of their main home to children or grandchildren on top of the standard allowance.
This family home allowance will increase stepwise by £25,000 each tax year, until it reaches a maximum of £175,000 in 2020/21. This means that by 2020/21 an individual homeowner will have a tax free allowance of £500,000, whilst a couple could pass on £1 million free of inheritance tax.
This obviously helps but the rules surrounding the family home allowance are fairly convoluted. Indeed, the whole area of inheritance planning can be very complex and people often have to revisit their legal documentation as IHT rules are amended or their situation changes.
In addition, despite the new family home allowance, with rising house prices and asset values, more and more people are being hit with inheritance tax over and above this, as can be seen by the increased tax take over the last couple of years. Further, for those with large estates valued at £2 million or more, homeowners will lose £1 of the family home allowance for every £2 of value above £2 million.
So it can make sense to seek financial advice and to carry out some proper inheritance tax planning. This should start with revisiting or setting up a will, to ensure that your affairs are dealt with in a tax-efficient way and that your wishes are carried out.
After that, there are several steps that you can undertake, starting with taking advantage of exemptions, such as your £3,000 a year annual allowance, plus the small gift exemption, which allows you to give up to £250 to as many people as you like. There are also wedding gifts and donations to qualifying charities that you can make, along with gifts out of any excess income.
Beyond gifts, you can consider more complex options, such as taking out life cover, looking into business property relief and also using trusts which can be designed to meet your individual circumstances and objectives. Bear in mind that tax rules can change and any benefits depend on personal circumstances.
So if you believe you may fall into the inheritance tax net and wish to avoid this ‘voluntary tax’, why not get professional advice and talk to Kellands? We look forward to hearing from you.