Fiscal drag is pushing more families into the Inheritance Tax net
The last few weeks have seen the potential candidates for the Conservative party leadership talk incessantly about tax cuts – excluding former Chancellor Rishi Sunak who refers to such promises as “fairy-tale economics” (or something similar!)
One tax where it’s more a case of “nightmare economics” is Inheritance Tax (IHT) – supposedly a tax only to be “reserved” for the very wealthiest in the UK is now increasing its momentum as the IHT allowances currently available (nil rate band and residential nil rate band) are frozen until the end of the 2025/26 tax year whilst the main asset class which suffers the tax – UK residential and commercial property continues to increase in value. That’s the “fiscal drag” effect – we usually see it more in relation to Income Tax but why stop there – let IHT join in too and before you know it, this tax will soon be contributing a cool £8bn by 2025/26 and double the number of estates – some estimates are saying over 40,000 families, will be liable in the next 4 years.
So, what do you need to look out for if you wish to avoid joining this exclusive group of taxpayers:
- Check the value of your own and your spouse/partner’s current estate(s) – if it exceeds £1m including your private residence it’s time to have a grown-up discussion on how to avoid this unnecessary tax.
- If you have gifted assets to your family in the past 7 years or so, you must include the value of such gifts in your estate too.
- Do you also own Business Assets – like shares in a family company or commercial business premises occupied by a family business – does your Will make sense in terms of leaving “exempt assets” to the wider family.
- During Covid we have sadly seen many families lose a loved one and not surprisingly the IHT consequences have hardly sunk in – if you have lost a loved one in the last 20 months or so it is possible to consider a Deed of Variation to re-write the Will; by doing this it may be possible to mitigate future IHT liabilities for the family OR claim additional IHT allowances which may be denied on the death of the survivor.
- One of the biggest factors in mitigating IHT is following the sale of a family business or farm – often the business or land is (in part) IHT protected but as soon as the sale is completed the IHT exposure will increase significantly; however with forward planning pre the sale the impact on the family can be reduced substantially for the longer term benefit of everyone including your potential beneficiaries.
If there is one thing we have learnt at Langricks over the last few years it’s that IHT can often be one of the most unexpected taxes which a family will have to contend with – it’s not like VAT, Corporation Tax or Income Tax – where you know year-to-year that it’s coming and you can plan accordingly.
IHT very rarely gets the same attention but when it does families can be assured that they have taken all the steps necessary to avoid what is often called a “voluntary tax” and its associated stresses and strains which often accompany an IHT event.
If you need help with your own, your parents or business partner’s IHT strategies please contact Nigel Shaw on:
firstname.lastname@example.org OR 07585 004469
We are here to help and protect your business and your personal wealth.
Nigel Shaw is a Chartered Tax Advisor (CTA) and Founders Award (2018) member of Society of Trust & Estate Practitioner (STEP) with over 30 years’ experience of helping families with their IHT issues.
Find out more about our Inheritance Tax Services