The UK inheritance tax (IHT) haul continues to set new records as it rakes in £6bn for 2021. This 19% rise translates to almost £1bn more taxes collected in a single year. But if IHT was only intended to affect the ‘super wealthy’, why does the revenue it generates for the government continue to skyrocket?
UK inheritance tax is payable on the worldwide estate of a UK domiciled person who has passed away, as well as on gifts made by UK domiciled individuals within the seven years prior to death. Furthermore, UK assets are always liable to inheritance tax, regardless of the domicile of the owner. This year, IHT will affect around 33% more families, breaking all previous records.
Passing wealth and assets to loved ones can be a bit of a minefield from a tax perspective, so independent expert advice is always an advisable avenue to explore.
Here, we will examine the causes for this record figure, whether you fall into the IHT net, and what can be done to ensure you are not taxed unnecessarily.
Why has the collected inheritance tax breached £6bn?
The increase of almost a billion pounds of inheritance tax collected by HMRC over a 12-month period is due to a few factors, the most unfortunate of which is directly connected to the recent pandemic.
Covid-19 has had a terrible impact on many families, from all walks of life. The sad increase in the number of annual deaths meant that more estates than usual were assessed for inheritance tax.
This period has also seen record highs on property prices, where the value of the average UK home has been increasing by £44 per day over the last six months alone. The surge has increased the value of estates already subject to inheritance tax, but also pushed others across the tax threshold.
Finally, Chancellor Rishi Sunak’s decision to freeze allowances on tax payable till 2026, despite rising inflation, will likely see more families being caught in the IHT net, as least for the next five years.
What are the allowances and exemptions of UK inheritance tax?
Inheritance tax is charged at a flat rate of 40%.
The main allowance, or ‘nil rate band’, before tax is payable on IHT is £325,000 per person. However, it is possible for spouses and civil partners to pass any of this unused allowance onto each other completely tax free. Since spouses/partners are exempt, if your estate planning is structured so that assets are passed to the surviving spouse on the first death, then onto children or other heirs on the second death, a couple could have a potential combined allowance of £650,000.
There is also a second allowance, often referred to as a Residents Nil-Rate Band (RNRB), which currently allows an additional £175,000 per person. Again, this could be combined with your spouse or civil partner to £350,000 – but is only applicable when bequeathing a main home directly to your children or grandchildren. A couple, therefore, could have a combined total allowance of up to £1 million.
Note, however, that the RNRB allowance reduces on a sliding scale if the property is valued above £2 million, and both allowances are frozen until 2026.
From an individual point of view, there is no tax to pay on an estate if any of the following criteria are met:
• The estate is under the value of £325,000 threshold, or under £500,000 including a main home that is being left to descendants.
• You are leaving the estate to a spouse or civil partner
• You are leaving the estate to a registered charity
• You are leaving the estate to a community amateur sports club
When it comes to gifts, you can give up to £3,000 each tax year that will not be counted with your estate or included with any future inheritance tax assessments.
The domicile issue and expatriates
UK IHT is determined by domicile, not residence. You can live in overseas for many years and still be a UK domicile, making your worldwide estate liable (except in France, where the situation is different). If you hold assets in the UK, these will be taxable regardless of your domicile status.
Also, whether you live in the UK or abroad, if one spouse is a UK domicile and the other is not, it is worth noting that the usual spousal exemption is limited to where the non-UK domiciled individual inherits from the one who is UK domiciled. If this applied to you, take personalised, specialist advice.
If you are worried about how inheritance taxes (both UK IHT and the local version in your country of residence) will affect your heirs, it is advisable to seek independent, expert advice.
Everyone’s circumstances differ, and estate planning is even more complicated for expatriates who have assets and heirs in different countries, so receiving guidance from a specialist with cross-border expertise, like Blevins Franks, will help you navigate all the complexities. This will afford greater peace of mind for you, and for your loved ones.
Contact us for personalised advice