With HMRC’s revenue from inheritance tax (IHT) forecast to reach a record £4.6bn for the 2015/16 tax year, the need for savers across the UK to consider the options available for obtaining IHT relief and protect against a potentially unexpected tax bill could not be greater.
IHT comes into effect upon death if the value of an individual’s ‘estate’, which includes property, money and possessions, exceeds their tax-free allowance of £325,000 per person or £650,000 for married couples and civil partnerships, otherwise known as a nil rate band. Assets over this threshold will be subject to IHT at up to 40 per cent.
Changes to these thresholds are set to come into effect by 2020 through the introduction of a new ‘family home allowance’ totalling £175,000 per person, raising the nil rate bands to £500,000 for individuals and £1m for married couples and civil partnerships.
IHT was once considered a tax that only affected the wealthiest in society, yet over the years many more people have found themselves over this threshold.
Rising property prices have been a key driver here, especially for those living in London, where the average house price is already more than £600,000. The Office for Budget Responsibility (OBR) also estimates that the number of family estates liable for inheritance tax has increased from around 15,000 in 2010 to more than 40,000 in 2016.
Against this backdrop, many people who may traditionally never have considered the potential impact of IHT will be approaching the varied and often complex process of IHT planning for the very first time.
Each of the different options available to obtain IHT relief are unique, with their own pros and cons, and it is essential that both clients and advisers carefully consider all possibilities before deciding which options can best meet their needs.
Perhaps the most traditional method for obtaining IHT relief is gifting, essentially a term for when an individual gives money or assets away to a person of their choice.
On first glance, gifting can appear the simplest way to mitigate IHT, but there are a number of factors to consider. Each person has a gifting tax-free annual allowance of up to £3,000 per year which they can pass onto their children.
However, the situation becomes more complex if the gift is over this allowance, with the individual required to live for seven years after the gift has been made before the assets will be exempt from IHT. This seven-year qualifying period is likely to prove a particularly important consideration for older clients.
Loss of control is also an inherent part of gifting, as the individual making the gift cannot dictate when and how the assets are used by the person who receives them.
A parent who gifts a sum of money over £3,000 during their lifetime to one of their children, for example, will have no real power to suggest that the funds are saved for a specific goal instead of being spent immediately.