Inheritance Tax – bigger than ever

Recent statistics reveal that a record amount of IHT was being paid by estates in the tax year 2017/18.  £5.2billion* of IHT was paid, up around 92%,  since the  2010/11 tax year  when HMRC pulled in £2.7 billion.  This is an enormous increase which is probably due to a number of factors.  Firstly the nil-rate band has been frozen at £325,000 per individual since 2009/10 and in the interim house prices and shares have generally increased significantly.  But another factor might be that many people are just not seeking  advice on how to mitigate this tax.  Moreover  the increase in the amount of  IHT  collected by HMRC comes despite the new main residence nil rate band allowance which will mean that a couple will be able to pass up to £1m to their children by 2020/21 (as long as the family home is included). 

I suspect that much of the problem is due to the fact that talking about IHT means talking about death and many people are reluctant to believe that they have reached the time in life when this starts to be a pressing matter.  I’ve heard people say that they’ll simply spend the money or that it will go in care fees anyway and this is an easy way to avoid the topic.  However, the fact is that more money is being paid in IHT due to lack of planning.  A recent survey by Which revealed that 61% of us don’t have a will which demonstrates the vast majority of us aren’t prepared to face up to the inevitable.   Our millennials are constantly pointing out that they are debt ridden (from university fees), unable to buy  their own property  and can’t start a pension – let alone a  family  – because they are unable to afford it.   Steep house prices and a flood of graduates chasing top jobs has inevitably meant that many are stuck in lower paid jobs and will need years to save up towards a home of their own.  I doubt this situation is going to improve and therefore there is a need to start planning for the coming generation’s  finances early on.  The earlier this is started the better as a longer time frame means that more risk and consequentially more potential returns can be earned on the savings.   This can be done by grandparents (or parents – if they are financially able).  Regular savings from normal expenditure would be exempt from IHT and building up savings with a long time frame and a reasonable risk framework would mean that there may be a reasonable  fund available for house purchase and that by the time they reached retirement age there might be a substantial pension fund.  Funding a pension is a viable option for young children as there are significant tax breaks and the money will be made available at retirement (so no chance of blowing it all on a motorbike at 16).  Often, in retirement,  income is generated and not used and just recycled back to bank or building society accounts which are currently earning  very poor interest rates.  Redirecting this unused income towards a pension plan or savings plan for a grandchild might make a huge difference to their future and you may save some IHT.

There are many ways of mitigating IHT and it’s important to seek advice.  For some, the new main residence nil rate band may solve the problem (although please note that legislation can, and often does change), but for others a range of planning may make a difference to the amount of IHT payable and could provide some relief for the challenges facing new generations.

Please note that the Financial Conduct Authority does not regulate Inheritance Tax Planning

*Figures from HMRC

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