UK inheritance tax bills could rise, and more families dragged into the inheritance tax net, over the next six years. We have warned for some time that increasing longevity will lead
UK inheritance tax bills could rise, and more families dragged into the inheritance tax net, over the next six years. We have warned for some time that increasing longevity will lead to higher taxes, and the UK government has now taken the step to increase revenue as part of its reform of the cost of social care for the elderly.
On 11th February Health Secretary Jeremy Hunt confirmed speculation that the inheritance tax nil rate band ? the amount of your estate your heirs can inherit tax free ? will be frozen for several more years. This is effectively a tax rise in real terms because of inflation.
The move is quite a contrast to the Conservative Party?s pre-election promise to raise the threshold to ?1 million per individual.
If you are a British domicile, UK inheritance tax is charged on your worldwide estate at the time of your death, plus any assets you gave away as gifts over the last seven years. Since it is based on domicile rather than residence, British expatriates with estates above the threshold continue to be liable for this tax, unless they have successfully adopted a domicile of choice in their new country of residence. UK assets are always liable to inheritance tax regardless of domicile.
Changing your domicile is hard, but not impossible if you intend to live in your new country of residence permanently and cut ties with the UK. You need professional guidance because getting it wrong could be very costly for your heirs. You should also consider how any local inheritance tax rules interact with the UK rules, and a specialist firm like Blevins Franks will guide you through the rules in both countries and how to lower your tax liabilities.
The current nil rate band is ?325,000 per individual. Spouses and civil partners have a potential combined threshold of ?650,000. The tax rate is then a fixed 40%.
In the past, this threshold increased each year with inflation. It has however been frozen since April 2009, an austerity measure introduced by the then Labour administration. The coalition government confirmed in the 2012 budget that there would be no change until at least April 2015.
As part of the Autumn Statement last December, Chancellor George Osborne announced that the threshold would increase by 1%, rounded up to ?329,000, from 2015. 1% was lower than the rate of inflation, but it was better than nothing.
Just a couple of months later, however, this has been overturned. The threshold will now remain frozen until at least 2019 – that will be 10 years with no change.
This was announced as part of the government?s plans for funding care for the elderly. It proposes that from 2017 a cap of ?75,000 will be introduced on the costs people pay for care. After this the state will take over the costs.
The inheritance tax freeze will fund around 20% of the costs. Changes to pensions and National Insurance are also expected to contribute to the funding.
It is calculated that freezing the threshold until 2019 will bring an extra 5,000 estates into the inheritance tax net, earning the Treasury an extra ?1 billion tax revenues each year.
If the threshold increased with inflation, it would reach ?420,000 by 2019. This means that families could lose an extra ?95,000 from their inherited estates in 2019.
The government argues that this is a fair system as people will not be forced to sell their home and/or use all of their savings to pay for care. Many more people will gain from it than lose from it, it claims.
On the other hand, the Chief Executive of the Taxpayer?s Alliance, Matthew Sinclair, commented:
?This sleight of hand from the chancellor is unfairly punishing families who simply want to leave something to their relatives when they pass on.
?Inheritance tax is a double tax on assets and income that the taxman has already taken his cut of many times over.?
He agreed that the government needs to address the future cost of social care, but said this should not be by going back on its word and introducing higher taxes ?by the back door?.
Longevity will continue to be a headache for governments. It will remain an issue long after the economic crisis is behind us. This means that the government may still have to increase tax revenue even when the need for austerity measures is over.
For advice on tax planning for today and the future, on your estate as well as on your savings and investments, seek expert professional advice from Blevins Franks which has decades of experience advising British expatriates on effective tax mitigation and wealth management strategies.
14 February 2013
The tax rates, scope and relief may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.