UK inheritance tax is one of the most unpopular taxes in Britain and yet, even though it can often be mitigated or avoided, relatively few people bother to take steps to do so. Are you one of the
UK inheritance tax is one of the most unpopular taxes in Britain and yet, even though it can often be mitigated or avoided, relatively few people bother to take steps to do so. Are you one of the 12% who have made an effort to reduce the amount of tax your heirs will have to pay, or one of the 88% who hasn?t?
Being an expatriate does not automatically free you from this tax as it is based on domicile rather than residence and most British expatriates retain their UK domicile.
According to the latest Tax Action Report by financial website unbiased.co.uk, this year taxpayers in the UK will waste ?1.3 billion because of poor inheritance tax planning. In other words, ?1.3 billion will unnecessarily be handed over to the government in IHT payments, with 88% of people not taking any steps to reduce their liability. The average individual IHT payment is ?80,000, which is quite a sum of money to be gifting to the taxman.
Chief executive at unbiased.co.uk, Karen Barrett, commented that when vast sums are paid unnecessarily in IHT because of inadequate provision, ?such situations can only bring additional unwelcome stress for the deceased?s family at an already difficult time, as the tax must be paid before the estate can be released and any inheritances can be passed on?.
One notable change to IHT was introduced in 2007 when spouses and civil partners became able to transfer the allowance to each other on death, increasing the threshold for their estate from ?325,000 to ?650,000. This was obviously a welcome change for couples, but it does discriminate against unmarried people including siblings who own a house together. Above the threshold, IHT is at a fixed rate of 40%.
In their General Election campaign last year, the Conservatives had promised to increase the threshold to ?1 million (so ?2 million for couples). The UK has had a Tory prime minister for a year now, but the threshold remains ?325,000. The previous government had frozen it for four years. It would normally increase each year in line with inflation and the fact that it is frozen until 2014 means more people will be liable to IHT, especially if house prices improve.
The inflation link was already a controversial issue since the 1997-2007 house price boom catapulted many more families into the IHT net. There were various calls for the threshold to be increased in line with property prices instead. It is calculated that if it had begun rising with property prices in 1997 it would now be ?560,000.
The March 2011 Budget did include an amendment to the link to inflation, but not in the way that had been hoped. Currently the annual increase in tax allowances is linked to the Retail Price Index, but from April 2012 this will change to the Consumer Price Index. Since the CPI is generally lower than the RPI, this is in effect a subtle tax rise. The Treasury calculates it will raise over ?1 billion a year for the government by 2015.
This affects the annual ISA and capital gains tax allowances as well as the IHT threshold once it stops being frozen. According to calculations in the Sunday Times, linking to the RPI as usual would mean the nil rate band increases to ?393,000 in 10 years time, but under the new CPI system it could increase to ?373,000. After 40 years the difference could be as much as ?211,000.
This year?s Budget included another small change to IHT. If you give 10% of your estate to charity, the tax rate on the balance of your estate after the threshold is deducted is reduced from 40% to 36%. This actually leaves your beneficiaries a little worse off. For example, on an estate of ?900,000, and supposing a single nil rate band of ?325,000, your heirs would receive ?34,600 less if you give 10% to charity.
But then again, if you have the choice of leaving money to a charity or the taxman, which would you choose?
There may be further changes ? perhaps significant ones ? to IHT in future. In March the Office of Tax Simplification (OTS), which was set up by the Chancellor, proposed that there should be a ?proper review? of IHT.
Will the proposals, when they come, reduce our IHT liability? Perhaps. Or perhaps they will benefit the Treasury instead. And either way, it will obviously depend on whether the government adopts the OTS proposals or not.
I would not bank on your IHT liability being reduced in the future. If your total worldwide estate is worth more than the IHT threshold, my advice is to take steps now to lower the liability for your loved ones. Don?t risk leaving it until it?s too late.
Your situation is unique so you need to establish which methods specifically suit your circumstances. For expatriates this will depend on whether you have broken, or can break, your UK domicile and whether there is any chance that you or your spouse will return to the UK one day. You also need to consider the local inheritance tax position, if any, in your country of residence. You should therefore take professional advice from an experienced and international advisory firm like Blevins Franks.
By Bill Blevins, Managing Director, Blevins Franks
27th April 2011
The tax rates, scope and reliefs 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 must take personalised advice.