Many people are reluctant to consider Inheritance Tax planning as it means confronting their own mortality. But it makes sense to do so now despite suggestions that the Conservative Party may abolish it if they win an election.

At the recent Conservative Party Conference, Chancellor Sajid Javid said that scrapping Inheritance Tax was “something that’s on my mind”.

“I do think when people have paid taxes already through work or through investments… there is a real issue with then asking them, on that income, to pay taxes all over again,” he said.

Javid’s comments highlight one of the biggest arguments against Inheritance Tax (IHT): the fact that it is perceived by some people to be double taxation.

A counter-argument to this is that we are already subject to double taxation in that we pay VAT out of taxed income. Also, it is the deceased’s estate rather than the person who has died who is taxed, so technically at least the same person is not being taxed twice.

Supporters of some form of inheritance tax defend it on moral grounds. Adam Smith said “a power to dispose of estates forever is manifestly absurd”, and Warren Buffet claimed it creates an “aristocracy of wealth”.

It remains to be seen if Sajid Javid’s statement is merely an inducement to potential Tory voters prior to an election. It would make sense from a political standpoint if it is. Despite the fact that just 5 per cent of UK estates pay Inheritance Tax, 59% of the population believe it is unfair (according to a YouGov poll in 2015).

Current IHT system

Under the present system, no IHT is charged on the first £325,000 of someone’s estate (including the value of gifts made within seven years before death). This is called the ‘nil rate band’ or NRB. There is normally no IHT charge if you leave everything above £325,000 to your spouse, civil partner or a charity. If you leave your home to your descendants, the threshold can increase to £475,000 provided your estate is worth less than £2m.

If you are married or in a civil partnership and assets left other than to your spouse/civil partner, say to children, are less than your NRB, any unused amount can be added to your partner’s NRB when they die. This means their NRB can be as much as £950,000.

The standard IHT rate on death is 40 per cent and is only charged on the value of the estate over the available NRB. It can be worthwhile making gifts before you die. If there’s Inheritance Tax to pay, it’s charged at 40% on gifts given in the three years before you die but gifts made three to seven years before your death are taxed on a sliding scale known as ‘taper relief’.

You can also give away £3,000 worth of gifts each year tax free and can give as many gifts of up to £250 per person as you want during the tax year (as long as you have not used another exemption on the same person). There are other exemptions, too. Also, leaving 10% or more to charity reduces the rate to 36%.

Inheritance Tax planning

There are a number of steps people can take to avoid Inheritance Tax through careful tax planning. For example, some business assets can qualify for relief, and putting assets into trusts can be a useful mechanism in certain circumstances.

But many people are reluctant to consider IHT planning. Psychologically many clients do not like to confront the idea of Inheritance Tax for a number of reasons, including:

  1. They don’t want to consider their own mortality.
  2. How do they know they won’t fall out with their children if they choose to gift assets early?
  3. They don’t want to give away assets to children in case they divorce.
  4. They are concerned about giving away too much, as gifts have to be made absolutely. If you ‘retain a benefit’ in gifted assets, they remain part of your estate for Inheritance Tax.

The excuse I often hear is: “Well, I didn’t inherit anything and therefore if my children have to pay IHT on my assets, they will still be better off than I was when I started.”

Interestingly enough, this last point is often dismissed as people get older. When they understand the full implication of how much tax would be payable on assets they have worked hard to accumulate, they are willing to start to plan in order to try and reduce the IHT liability when they die.

If you would like to discuss Inheritance Tax planning, please contact Melvin Kay at melvin.kay@mgr.co.uk or Jill Springbett, tax partner at jill.springbett@mgr.co.uk.