HMRC Inheritance tax receipts rise to £5.4b – how to manage and reduce your IHT costs

12 mins read

Inheritance tax (IHT) is usually charged on estates valued higher than £325,000 where a person has died and is passing on assets to beneficiaries. Where IHT is due, it is usually levied at 40 percent on the parts of the estate valued above the £325,000 threshold, but this bill can be managed and reduced through the use of certain trusts, gift giving and charitable donations.

Eugenia Campbell, tax director and inheritance tax specialist at RSM, examined the statistics and concluded future reform of the system could no longer be “ruled out.”

Ms Campbell said: “The increase of four percent (£190million) in inheritance tax receipts in 2020/2021 takes the total tax take at £5.4billion and reverses the fall from last period – effectively showing a return to pre-pandemic levels.

“We’ve already seen an increase of £0.4billion in April to June 2021 when compared to the same period last year and a similar increase was recorded in October and November 2020 and March 2021, so the upward trend as we come out of the pandemic is continuing.

“However, a full analysis, and in particular the impact of the COVID-19 pandemic, is not yet available, as there tends to be a two-year time lag for the administrative data to become available. HMRC believes that this increase is possibly due to higher volume of wealth being transferred during the pandemic. Most likely this is a consequence of a failed Potential Exempt Transfer (PET) or end of life tax planning; the operation of the will; or as a result of intestacy.

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“Interestingly, there was a fall in the number of deaths resulting in an IHT charge in 2018/19, which could be due to the phased introduction of the residence nil rate band; and there was an increased use of Business Property Relief (BPR) by £310m; and the value claimed against unquoted shares is now equal to the peak of the 2014 to 2015 tax year. However, to counter this there was a fall of similar value of Agricultural Property Relief (APR).

“For chargeable estates valued at less than £1million or owned by those aged under 65 years in the 2018/19 period, the majority of the asset value is made up of residential property. There is a more even balance of assets in the composition of estates valued at more than £1m and those aged over 65 years and for which the asset makeup provides more opportunities to claim APR and BPR.

“Estates worth more than £1million accounted for 81 percent of the tax liability created in 2018-19, but estates valued at less than £1million accounted for 96 percent of those requiring a grant of representation, suggesting a higher administrative burden for less valuable estates and supports the IHT administrative changes proposed by the Office of Tax Simplification which are being implemented.

“In addition, male owned estates had a marginally higher average, net capital value (£1.2million) than female owned estates (£1.1million) for the same period, but the female estates had a slightly higher tax liability of £212million versus £203million. HMRC suggests that this is explained by a higher life expectancy at birth for females who potentially outlive their spouses and are less able to use the spouse exemption.

“Overall, the total tax take from IHT is relatively small compared to other taxes – £88billion in just three months to June 2021 for income tax, capital gains tax, national insurance and the apprentice levy – but it is steadily increasing. Given the state of the Government’s finances some reform of the IHT regime to increase the tax take further cannot be completely discounted and as previous reviews by the Office of Tax Simplification suggest this has not been removed from the agenda “

Fortunately, while IHT can be a complicated and costly burden, certain actions can be taken to manage and reduce what’s owed.

With this in mind, Svenja Keller, the Head of Wealth Planning at Killik & Co, provided advice on what to consider when it comes to IHT.

Start thinking about it early

Estate planning can be an uncomfortable area to tackle but Ms Keller urged families to remember the sooner it is handled the better.

Ms Keller said: “Estate planning is a big topic but it shouldn’t be avoided. Whilst it can be difficult to make large gifts or use other planning solutions when the family is still young, it is wise to go through the process of thinking about it early. Even if the result of the conversation is concluding you will only do small things now but plan to do more in the future, at least the family knows where they stand.

“This also helps with the overall family conversation – if you have conversations from an early age, it becomes more normal to talk about these things. Starting early can also help with my next tip (using allowances regularly).”

Use all available allowances, consistently and regularly

Ms Keller continued: “This is what I call good housekeeping. Most allowances are not big and won’t make a significant impact if only used once. However, if the allowances are used consistently every year over a long time period (because you started early), they can make a big difference. The allowances are legitimate ways of planning. The legislation specifically mentions them and there is therefore no tax / planning risk involved. In addition, there is little complexity in doing this either.

“However, it is worth noting that you can use allowances by way of outright gifts (less complex) or by way of gifting into trust (more complicated).”

Don’t forget the option of spending

In a paradoxical twist, spending money while one can may provide reduced costs incentives over the long term.

Ms Keller explained: “Always remember that spending the money is the first option for inheritance tax mitigation. Estate planning can have many different objectives, which are all slightly different and it will be important to understand what the main priority is – passing wealth on to the next generations, minimising inheritance tax or ensuring that there are liquid funds to pay the inheritance tax. If the objective is to minimise inheritance tax, spending the money and enjoying life can be a good option.

“Many people feel guilty about wanting to do this but remember it is your money to spend, you’ve worked hard for it. It is also good practice to ensure that you have sufficient funds for yourself (now and in the future) before wealth is passed on to next generations. It is the same principle as ‘putting your life vest on first’. The pandemic has made considering this even more important, we found at Killik & Co that half of UK grandparents (48 percent) have stepped in to financially support their grandchildren during the COVID-19 outbreak, despite being concerned about their own retirement income.”

Keep it simple and seek advice

Of course, where savers may feel overwhelmed seeking out professional guidance is likely to be a safe bet.

Ms Keller concluded: “There are many complex estate planning solutions out there. They can work but they come with cost and complexity. Whilst an inheritance tax saving of 40 percent can be significant, it needs to be set against the costs that are incurred for the advice and to keep the structure going for the long term. In addition, estate planning is long-term and a lot of these structures can be inflexible, which means once you are in them it is difficult to unravel them if circumstances or legislation change.

“Complex solutions aren’t always a bad thing – they do have their place – but be careful what you agree to and to what extent you tie yourself in. It’s important you understand all your options first and compare them to each other in terms of costs, complexity and flexibility.

“Inheritance tax legislation is complicated and full of anti-avoidance rules too. You don’t know what you don’t know and it is easy to miss or misinterpret a small part of the rules. If in doubt, speak to an adviser. Financial advisers, private client solicitors and tax advisers all have expertise in this field.”

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