Is Scrapping IHT on the Horizon: Private school tuition and inheritance tax are back in the news, which can only mean one thing, the fake war preceding a real General Election campaign has unofficially begun. The battle for the ballots of Middle England has begun!
I will refrain from discussing Labour’s proposal to add a 20% “value added tax” to private school tuition and instead focus on inheritance tax reform, which has been debated for what seems like decades. In an article titled “Inheritance Tax Faces Radical Overhaul” published in January 2020, I stated that the All-parliamentary Group on Inheritance and Intergenerational Fairness (APGG) had proposed reducing the rate from 40% to 10%. Now, chancellor Jeremy Hunt may be preparing to go even further and eliminate the tax dubbed “Britain’s most hated tax” Whether or not this is “fair” to those who have just paid it is irrelevant, but I’m certain income tax is more reviled, despite being less readily associated with mortality. It is also an idea at this point, and “promises” are typically canvassed and focus-grouped to death before becoming a reality.
Is Scrapping IHT on the Horizon?
It is undoubtedly feared by the property-owning classes in the south-east of England, where houses are typically valued above the £325,000 “nil rate band” at which point the 40% flat rate applies. Less than 10% of estates are currently subject to IHT, although this number is increasing. Recent projections for April to August 2023 indicate a 10% increase in tax receipts to £3.2 billion. As a result of “fiscal drag” caused by frozen allowances, more individuals are anticipated to be responsible for payment. These bands are frozen until 2028, so despite a decline in home prices, you can see how this will attract more people to the internet. “Do not be fooled into believing that this will not influence you. It’s not just the value of your property that you need to consider, it’s your whole ‘net estate’ after liabilities have been considered and reliefs have been applied, which adds up over a lifetime,” says Julia Peake, tax and estate planning specialist at Canada Life.
This conveys the element of dread that accompanies an inheritance tax bill. Circumstances play a role; frequently, those who receive a (very prompt) charge from HMRC are grieving the loss of a parent and attempting to settle the loose ends associated with winding up an estate. The precipitous nature of the 40% can also be devastating. The rate is likely the simplest aspect of IHT to comprehend. The deceased may have paid a substantial amount of tax during their existence, and this appears to be a ruthless money grab by the government. If you believe the government spends your money wisely, this shouldn’t be a major concern. However, this appears to be free money given to an indebted government, and it is no consolation that paying the tax places you in an elite group of wealthy individuals. At least income tax feels more voluntary while you are alive, despite the fact that most people on PAYE have no choice. So IHT simply adds to the government’s overall spending budget.
Those who consider themselves to be “just middle class” may be offended by this bill, particularly if – unlike ultra-high net worth individuals – your relatives may be “accidental” IHT victims, as opposed to those who meticulously plan to avoid it.
“IHT is starting to impact increasing numbers of relatively modest estates, and as inflation means property and other asset prices tend to rise in the long term, more families – and more of each family’s resources – will be driven over the IHT threshold. Therefore, an increase in the nil-rate band would likely be more welcome, according to Ian Dyall, head of estate planning at prominent UK wealth manager Evelyn Partners.
Due to the age of my friends, inheritance tax is one of the personal finance topics I am most frequently inquired about. “Am I liable?” is the initial query, and the £325,000 is generally regarded as an absolute line in the sand. However, this is a per-person limit, so the price for a couple is £650,000. In recognition of the fact that the IHT thresholds have not kept pace with rising home prices, the government has added a £625,000 “residential” nil rate band to this figure. But it comes with a major caveat: that the property has to be passed on to children or grandchildren. In reality, the majority of descendants sell out. And the taxman is aware of individuals “transferring” the deeds to their expensive property during their later years.
The earlier this issue is addressed, the better the outcome for everyone; financial decisions made on the deathbed are typically poor and made too late. Asking an IFA about gifting opportunities, charity, and the oft-mentioned “seven-year rule” is prudent.
Instead of relying on media articles, I would urge the reader to consult the official tax tables and seek financial or tax advice. In conclusion, the threshold may be higher than you believe. Determining what is included for IHT purposes is another perplexing aspect of the estate dissolution procedure. With articles about “ISA millionaires” appearing annually in March and April, IHT may be the tax that spoils the party. ISAs may provide numerous tax advantages, but IHT is not one of them. Those who do not believe that ISA savings are part of their patrimony can be taken by surprise.
Some pensions offer exemptions from IHT, which is a factor in their favor as a long-term estate planning tool. Moreover, if you have a mix of defined benefit and defined contribution pensions, you should not presume that they can be passed on without verification.
AIM has attracted investment capital in recent years because, in exchange for supporting smaller British businesses, the government provides IHT exemptions. The same logic applies to Seed Enteprise Investment Schemes, which are popular for those who fill out their ISA allowances. Nicholas Hyett, investment manager at Wealth Club, believes that eliminating IHT would be negative for AIM investment. However, according to him, dedicated IHT-avoidance products represent a minor portion of the market. He does not believe that IHT will proceed. “Removing this relief would inevitably have a negative impact on company valuations and could cause significant market disruption,” he adds.
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