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Modern Inheritance Tax: protect your family

View profile for Tim Ogle
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Modern Inheritance Tax: protect your family

Modern Inheritance Tax (“IHT”) dates back to 1894 when the government introduced Estate Duty, a tax on the capital value of land. It was designed for the rich, a way of preventing rich parents from passing on wealth to rich children. It is now seen as a tax on Middle England.

In terms of revenue, in 2019-2020 it raised £5.1bn, compared with £130.1bn from VAT, for example. Yet it is the former which is universally loathed. 

Rishi Sunak’s recent Budget made no obvious changes to IHT. However, the 5-year freeze on the IHT allowance is expected to raise an additional £985m of revenue, all to help pay for the cost of the pandemic.  

IHT is payable at 40% of the value of an estate over a nil rate band of £325,000. Given the rise in death rates related to COVID, together with rising house prices, an additional 20% of estates are expected to be brought within the IHT net by 2026. Also, revenue from the tax is expected to increase to £6.6bn.

The IHT threshold has been fixed at £325,000 since 2009, over which period house prices have doubled, hence the reference to IHT as a tax on Middle England. Had the nil rate band risen with inflation in that time, it would now be £450,000.

The Residence Nil Rate Band, which offers a further tax-free allowance of £175,000 to those passing on their family home to a child or direct descendant, is also fixed until 2026 at the earliest.

Given the unpopularity of IHT, there are calls for its fundamental reform. For example, a much lower tax rate of 10% whilst, at the same time, removing all the legitimate ways of avoiding or mitigating it. 

In the meantime, though, it would be prudent for all those wishing to minimise IHT on their estates to consider these forms of mitigation. They include making use of the £3,000 annual gift allowance, £250 small gifts allowance and £5,000 wedding gift allowance for parents (£2,500 for grandparents).

Moreover, gifts of any value more than 7 years before death will not attract any IHT (provided no benefit from the asset is reserved by the donor). One can also make regular gifts of any amount from surplus income, without suffering IHT, even if within 7 years of death. There are also certain high-risk investments one can make which are free from IHT.

As always, however, it is more important for anyone considering estate planning to first consider the financial needs of themselves and their partner for the remainder of their lifetimes. Whilst our children are lovely, needy and deserving, the tax tail should never wag the dog.

If you are thinking about estate planning, please contact our specialist solicitors for a free, no obligation, 15 minute conversation about how we can help you. I can be contacted on 01206 217616 or