There is currently a lot of speculation around whether the new government will look at measures to increase revenue from inheritance tax (IHT), perhaps as early as the Autumn Statement expected in mid-to-late September, but there are also calls to make the system fairer.
The research group Demos published the findings of its research this week (14 July) and says IHT is “ripe for reform”. It says around 4.2% of inheritance passed on in 2019/20 was paid in tax. This compared to 9.7% in South Korea. If the UK taxed the same proportion, it would have raised an additional £6.5bn.
The report also says the system could be fairer as here in the UK, the wealthiest estates tend to pay lower effective rates (the percentage of all IHT paid). Those estates worth between £2m and £7.5m paid 25% in 2020/21 whereas those over £10m paid only 17%.
Looking at other countries, Demos is suggesting reform could focus on:
- Reworking the exemption for business property to ensure it provides value for money
- Introducing progressive rates, increasing the rates for the most valuable estates
- Consulting on hypothecation (earmarking the tax to a specific spending commitment to improve public awareness of the tax revenues)
- Removing the capital gains uplift and charging capital gains when the asset is sold
- Clamping down on remaining non-dom avoidance opportunities
Whatever the government is considering, we know they say there is an urgent need to raise tax revenues.
A question we are frequently asked by new clients is where to start with IHT planning. If you haven’t taken any action and your wealth has increased in recent years, then the starting point is to look at your total balance sheet. If you have already given IHT planning consideration, then we would be looking with you at whether that planning is still effective.
Some people might also be considering giving away more of their wealth during their lifetime, and following on from the confirmation in the King’s Speech today (17 July) that private schools will lose their VAT exemption and will have to charge VAT on fees in the future, then helping children or grandchildren or making greater provisions for your own children in the future might be a place to start.
Everyone has the annual tax-free gift allowance, which can be used to gift up to £3,000 per person, per year.
Grandparents can pay school fees out of surplus income, providing they have sufficient funds to maintain their usual standard of living.
A discretionary trust could be used to ring-fence assets for future education – private school or university fees. Each grandparent has available a nil rate band allowance of £325,000, which can be paid into the trust every seven years without triggering a IHT charge.
Pension drawdown can also be used by those aged over 55 years, as 25% of the fund can be taken tax-free.
If you are a parent, then you could use your own ISA allowance and start early to build a good pot of money, as this is within a wrapper free from income and capital gains tax (CGT). Over a five-year period, a couple both using their full ISA allowance could have a joint pot of £200,000 before any of the growth of funds is included.
Another way that you can help save for your child or granchild’s future and reduce your exposure to IHT is to make annual payments into a Junior ISA on their behalf. Each child can have £9,000 paid in each year, and the money belongs to the child and they can’t take it out until they reach 18.
Parents or grandparents considering any of these options should take specialist tax advice to take into account their own circumstances.
Whether you are concerned about possible changes to IHT, keen to check your plans are still effective for your loved ones, or if you want to look at ways to reduce your wealth to help the next generations in life, then get in touch with Henry Lowe or a member of our Private Client team today.
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