As we all know, Inheritance Tax (or the ‘death tax’ as it is often ironically referred to), is viewed by many as being unfair. So the recent news that Chancellor Philip Hammond has asked the Office of Tax Simplification (OTS) to carry out a full review with consideration to a more simplified scheme, has been widely welcomed.
In a recent letter to the OTS, Mr Hammond acknowledged that, “IHT, and the system within which it operates, is particularly complex”. However, even with our own chancellor agreeing that it’s too complicated, it is important to highlight that early and effective planning can minimise its impact on your estate.
Afford Bond Partner, Paul Edwards said: “Currently, if your estate is worth more than the standard nil-rate band of £325,000, you may potentially be liable to 40p tax for every pound that exceeds the threshold.
“With the recent upward trend in the property market, many more of our private clients and small business owners have unexpectedly found themselves in this category. It gives rise to unplanned tax liabilities for the unwary and it’s only early planning which can help mitigate its impact”.
Another important consideration is the new residence nil rate band. Broadly, if you leave your main residence to a lineal descendant (for example, grandparent to parent or parent to child), a further £100,000 is added to the standard nil rate band of £325,000. This allowance will gradually increase each tax year to £175,000 in 2020/21. Unused elements of both allowances are transferrable on death to a surviving spouse or civil partner. This can potentially result in a surviving spouse having an IHT threshold of up to £1m.
“But please remember, said Partner, Paul Edwards: “When talking to your accountant about IHT planning, expert advice needs to cover:
– the family home
– the use of trusts where appropriate
– examination of share structures
– lifetime gifts
– tax efficient Wills”.
The IHT scheme has also been criticised for being both complex and discriminatory against those who do not own their own home, those who do not have children, and those who are not married or in a civil partnership. Even if there is potential to simplify IHT exemptions, it’s probably too much to hope that the tax will be scrapped any time soon.
“After all, the cash-strapped Chancellors of recent years have seemed increasingly reliant on taxing people’s estates posthumously,” said Partner, Paul Edwards.
Afford Bond are Cheshire’s leading Chartered Accountants and tax experts with offices in Nantwich, Wilmslow and Chester – our key competences are accounts, audit, taxation, payroll and corporate finance, and we see constant overlap in the delivery of these services demonstrating the need for qualified and experienced advisors.