Inheritance Tax (IHT) receipts for April to October 2020 were £33 million higher than for the same period the previous year, and IHT receipts for October 2020 were up 17% compared to October 2019.
The latest HMRC statistics for tax receipts show IHT receipts for October 2020, at £570 million were 17% higher than October the previous year’s £489 million.
HMRC believes that the higher receipts in the latest period is expected to be due to the higher volume of wealth transfers that took place during the early months of the Covid-19 pandemic but says it cannot verify this until full administrative data becomes available.
However, IHT receipts for April to October 2020 (£3,003 million) were only 1% (£33 million) higher than for the same period the previous year (£2,970 million), partly as HMRC has not been accepting cheques for payment of IHT due to Covid-19. This has caused a temporary delay in HMRC receiving IHT payments.
According to HMRC, this has now been resolved, and it expects this effect to unwind over the remainder of the year. However, at the time of writing, HMRC is still not accepting cheques for payment of IHT.
Before considering any steps to mitigate IHT, it is important to consider some fundamental questions, such as:
- What should your surviving spouse or civil partner inherit? Often the simple answer is ‘everything’, leaving many decisions about wealth distribution to other potential beneficiaries until second death.
- Who are the other intended beneficiaries?
- Are there specific items – from jewellery to shares in a family business – that you want to leave to particular individuals?
- What framework – if any – is needed for your bequests? You might be happy to leave capital outright to a 40-year-old architect daughter, but the same may not be true of a 19-year-old student son.
Answers to these questions will help you shape your Will and provide you with a structure for your IHT planning. It may also prompt you to consider whether making some lifetime gifts is a sensible option.
Certain gifts made during lifetime will be altogether exempt from IHT and so will fall out of your estate for IHT purposes as soon as they are made, such as the:
- Annual exemption: gifts of up to a total of £3,000 each tax year. To the extent that this exemption wasn’t used in the last tax year it can be carried forward and used in the current tax year, but only once the current year’s exemption has been used.
- Small gifts exemption: gifts of up to £250 each tax year to as many people as desired. However, the exemption does not apply to gifts to anyone who in the same tax year has received a gift covered by the £3,000 annual exemption.
- Normal expenditure gifts exemption: regular gifts out of surplus income that do not reduce your standard of living.
Other lifetime gifts, particularly if made outright, will in most instances attract no IHT when they are made and IHT will be avoided altogether if you survive for more than seven years after making the gift.
Transfers during lifetime or on death between spouses/registered civil partners are generally exempt without limit (this is not the case where you are UK domiciled and your spouse/registered civil partner is not) plus each person is allowed to leave up to £325,000 (taking account of any such gifts made in the immediately preceding seven years) to anyone other than their spouse/civil partner free of IHT (taxed at a nil rate). To the extent any of the £325,000 nil rate band is not used on death it can be “inherited” by (i.e. transferred to) a surviving spouse/registered civil partner, and, subject to a claim made within two years, used on the death of that surviving spouse/registered civil partner.
The same is largely true (but with important limitations on who can inherit, and how, within this allowance) of the residence nil rate band of £175,000.
Trusts can, of course, provide a way of controlling gifts by placing a third party, the trustees, between the settlor (the person making the gift to the trust) and their beneficiaries to deal with the gifted property in accordance with the terms of the trust that you create. Trusts can be as rigid or as flexible as you would like and can offer a range of tax and non-tax benefits.
The payment of regular contributions to a life insurance policy held in trust for those who will inherit your estate on death would normally qualify as being exempt. The sum assured under such a policy would not usually be treated as part of your taxable estate and would be payable free of IHT to the beneficiaries who could then use the money to pay the IHT arising on the death of the life or lives assured.
An IHT/estate planning review could be worthwhile to ascertain what, if any, planning and provision may be possible.
This is especially so because the £325,000 nil rate band will remain frozen until the end of 2020/21 and thereafter increase in line with the UK Consumer Price Index.
Careful consideration should also be given to the residence nil rate band and its use in planning and the fact that it is reduced by £1 for every £2 where your estate exceeds £2 million.
The future of IHT?
In 2020, the Resolution Foundation published a paper examining how to repair public finances, in which it suggested a freeze in the IHT nil rate band and bringing inherited pensions within the scope of the tax (and applying income tax on death benefits where death occurs before age 75). On business and agricultural reliefs, it suggested applying an overall cap of £2.5 million.
In October 2020, the Centre for Policy Studies suggested abolishing IHT totally and instead replacing the capital gains tax (CGT) exemption on death with holdover relief, meaning that your beneficiaries will pay CGT as if they had acquired the asset at the price you paid. As an alternative, it suggested raising the nil rate band to £1 million per person and scrapping the residence nil rate band.
And of course, it has been more than a year since the Office for Tax Simplification put forward its suggestions to Government on the reform of IHT so we can reasonably expect some changes before long.
To find out how UK IHT could affect you, and what you can do about it, contact your AAM Wealth Manager or, contact us today for a free financial planning consultation and get all your financial affairs in order.
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