The Final Tax
Inheritance tax is much hated but not often paid. In the most recent HMRC data we have, 99% of estates did not pay any inheritance tax. The remaining 1% of estates (generally those over £1million) paid tax but at an average rate of 25% (of the total estate) between £3million and £7.5million but the % rate is lower for estates worth less and more than these numbers. Generally, the estates in this range are paying the highest percentage burden as it is more than likely that the bigger your estate the better the tax avoidance advice you are buying.
An estate of £2.4million puts you in the top 1% of UK households and £3.9million moves you into the top 0.1%. The broader public view on tax is that income tax on higher earners is fair (a ‘high income’ is generally assumed by the person being asked, to be any number higher than their own income) but that inheritance tax (which affects a tiny number of the wealthiest people) is unfair. This is partly down to the fact that people overestimate their chances of paying it and partly that having paid all the other taxes for a lifetime, it can feel unfair to then pay another big slice on death.
“IHT is a …voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue” – Former Labour Chancellor Roy Jenkins
The point Roy Jenkins was making is that it is relatively easy to avoid inheritance tax but as we looked at in the section before the desire to hold back on making gifts gets in the way.
Inheritance Tax of 40% applies to single estates of more than £500,000 and joint estates of £1,000,000 (the nil rate band NRB plus residence nil rate band RNRB) if there is a property involved (otherwise it is £325,000 and £650,000 NRB). The nil rate band is also reduced gradually to these lower levels (£1 of nil rate band for every £2 over the upper limit), if your total estate is over £1,000,000 or £2,000,000 joint (upper limit).
For the slice of your joint estate between £2,000,000 and £2,700,000 (the value at which the nil rate band is fully reduced) you, in effect, pay a much higher rate of 60%.
The best way to avoid inheritance tax is to die with less than the combined Nil Rate Band and Residence Nil Rate Band of £500,000 (or £1million joint). The best way of achieving this is to spend and gift the rest away.
You can gift away £3,000 per year, or more if your surplus income is more. Surplus income is the difference between your net income and your expenditure. This is one of the most important gifting allowances for our clients, as it can allow them to gift large amounts away that are then immediately exempt. One of the problems with surplus income is that it tends to be at its peak in the ‘Golden Years’ which is the last decade or so of employment, when income tends to peak and often expenditure is reduced, as mortgages are cleared, and children are off the books. The problem with this is that it is often earlier than most people start to think about inheritance tax planning.
Good cashflow planning and advice at this early stage can help to gift surplus income (if it is not needed for retirement). This conforms with our approach of, regular smaller actions, earlier on achieving a bigger long-term tax saving.
The main rule to understand about gifting surplus income is that it must be regular (at least two gifts) but doesn’t have to be for the same amount.
If you don’t have surplus income but do have surplus capital, this can also be gifted but falls back into being taxable to IHT if you don’t survive seven years after the gift is made.
In the next sections we will look at the various ways you can avoid inheritance tax apart from gifting.
Inheritance tax planning is available to Altor clients in our Core Service.
Nothing on this website or its links constitutes a personal recommendation; the information contained is designed to be informative but not to be relied upon as individual circumstances could affect the relevance of this guidance.
Please also be aware that Altor is not responsible for the content or security of any other websites and that links are provided for your convenience only.