Avoid the Inheritance Tax trap
It remains a bit of a cliché that Inheritance Tax (IHT) continues to be everyone’s most hated tax when only 4% of estates actually end up with an IHT liability following the passing of a loved one.
Clearly, due to the complicated rules and regulations around IHT there is a bigger fear of the tax than actual reality!
This is not surprising though because the recent 2021 Budget announced a further freezing of the main IHT allowance (called the nil rate band and currently fixed at £325,000) until 2025/26. The last time the allowance was increased was back in 2009/10 so it’s pretty clear to many taxpayers what is going on here and perhaps this is contributing to such fears? That said, recent reports suggest that Rishi Sunak is however considering an increase of the current 40% to 41% on estates worth more than £325,000 (and a rate of 45% on estates worth more than £1m), although the timing of this is currently still uncertain.
From available Government statistics and forecasts we can see that the freezing of the “nil rate band” is designed to achieve one key objective – and that is to increase the number of estates liable to IHT over the next 5 years – a “cunning plan” as Baldrick would say but not a trap which we would want our clients to be caught by.
What do you or a member of your family need to consider to avoid falling into the Inheritance Tax trap?
- Assess the key values which drive the size of your current estate – what is your private residence worth (you may be surprised by this given recent “Lockdown” property price increases).
- Some assets in your estate “may” be exempt from IHT – for example, the shares you own in the family business; but some assets in the business may be “excluded” from this exemption which could increase your IHT exposure.
- If you are thinking of lifetime gifts don’t delay – (normally) you will need to survive such gifts over a 7-year period. That’s a long time and a lot can happen during that period!
- Many business owners following the events of the last 15 months or so, are looking at a potential sale of their business – this is probably one of the major impacts on your potential IHT liability and planning before any transaction can have major benefits, especially if you expect to retire fully from running your own business and enjoy a slightly more relaxed way of life.
- Proper IHT planning is not just a “one-off” exercise pre-retirement – it is an ongoing project which takes into account key changes to you and your family; changes in your business, the arrival of grandchildren and health concerns are all “triggers” which may require some tweaking to your IHT plan.
If you need help and support with your Inheritance Tax Planning please get in touch now and let us give you the benefit of over 30 years’ experience in helping our clients and their families not to become part of the 4% who end up paying IHT.