Tax & Planning IHT: How much will you leave to HMRC v. your family?

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In June HMRC published a monthly report that revealed a new record for IHT raised although, unsurprisingly, HMRC did not draw attention to the fact.

IHT receipts broke through the £5 billion barrier for the first time in the 12 months to May 2017. The total raised was £5.1 billion, 9% up on the corresponding figure for 2016. In April and May 2017 alone, receipts were up over a third on the previous year. 

The record tax take is due to three main factors:

1.    The nil rate band (NRB) has been frozen at £325,000 since April 2009. 
 
2.    Estate values have been rising, thanks to increasing share and property prices. 
 
3.    The primary tax rate above the nil rate band remains at 40%.
 
IHT tax payments will continue to grow, according to the Office for Budget Responsibility projections – with £6.2 billion of tax expected to be collected in 2021/22. The last year that the nil rate band is currently due to remain frozen is 2020/21. 

HMRC is very often the largest single beneficiary of an estate. For example, on an estate worth £1,000,000 split equally between three children, HMRC will receive £270,000 and each beneficiary £243,333 if there is only a single nil rate band available and no residential property to pass on.

Mitigation options

At a time when the Treasury is anxious to raise as much cash as possible and the focus is on higher taxes for the wealthy, there is little chance that any fresh legislation to dilute IHT’s impact will appear any time soon. However, two measures do offer some scope for mitigating the impact of IHT:

•    The residence nil rate band (RNRB), the first phase of which came into force in April this year at a level of £100,000 for each individual. The RNRB will ultimately mean that from April 2020 a married couple (or civil partners) could pass on a joint estate of up to £1 million with no IHT to payable, thanks to two NRBs of £325,000 and two RNRBs of £175,000. The key word here is ‘could’: the rules that apply to the RNRB are complicated and it’s important to ensure wills are correctly structured. 
 
•    Pension death benefits were granted highly favourable IHT treatment as part of the 2015 pensions flexibility reforms. Lump sum benefits payable on death are normally free of IHT, although the beneficiary will be subject to an income tax charge if death occurs on or after age 75. Similarly, pensions payable to any nominated survivor(s) are IHT-free – and also income tax-free if death occurs before age 75. 
 
If you do not want your estate’s beneficiaries to suffer from that increasing IHT tax take, the sooner you start planning the better. If you have already undertaken some planning, then you might well need to review matters in the light of the RNRB and pension rules mentioned above. For instance, the RNRB could mean that your will needs to be revised.  

Contact us to discuss your situation in light of the above. 

Jonathan Halsall – Latest Blog Posts

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