Taxed to death

Taxed to death

“My parents were ordinary people. Why are they paying so much inheritance tax?” I was asked this question some years ago by a female from London. It will almost certainly be repeated many times over the next few years.

Despite the spin surrounding the Budget’s introduction – from 2017 – of a “new £175,000 allowance for your house when you leave it to your children or grandchildren” this new legislation is unlikely to make much impact when you consider the chancellor’s opening statement in introducing this new relief. He said, “Today there are more families pulled into the inheritance tax net than ever before – and that number is set to double over the next five years. It’s not fair and we will act.”

HMRC’s latest statistics

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On 30 July 2015 HMRC released its inheritance tax (IHT) statistics for 2012-13. The highlights included tax receipts of around £3.8bn in 2014-15, up by 11.9 per cent from 2013-14. On top of this, approximately 3.1 per cent of all deaths in 2012-13 led to an inheritance tax (IHT) charge, up from 2.9 per cent for the preceding two years.

Each year residential property makes up approximately a third of the total value of taxpaying estates and about 17 per cent of cases where information was provided to HMRC on tax returns about estates with a tax liability had either missing or invalid postcodes.

This last statistic is perhaps most surprising. HMRC’s Form 400 (reporting the assets in a taxable estate) specifically asks for the postcode. If almost a fifth of personal representatives (or their advisers) is not correctly filling in HMRC’s form, what reliefs are missed, or other mistakes made, to the detriment of the estate?

I recall reviewing a Form 400 some years ago when asked to give a second opinion towards the end of an estate’s administration and picking up that the preceding year’s annual IHT allowance of £3,000 had not been claimed to set against a lifetime gift. When this additional relief was claimed, HMRC sent a refund of £1,200 plus a small amount of tax-free interest almost immediately.

More detail on the IHT statistics 2012-13 is shown in Box 1.

Lifetime IHT advice

The starting point must be that IHT is unlikely to go away and could get worse, that is to say, more onerous. If the current government simply took no further action, IHT would increase, probably significantly, due to the static nil-rate band of £325,000 and increasing real estate prices. Apart from London house prices, security prices are likely to have increased most over the past two to three years. HMRC has now released figures showing IHT receipts for the first four months of this fiscal year were £1.62bn – 27.3 per cent higher than during the same period last year.

A change of government could bring more focus on levelling the distribution of wealth by raising tax and less focus on reducing state expenditure. IHT is an easy target; in the 1970s estates were facing estate duty rates that could take up to 80 per cent of their value.