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Inherently unfair?

09 February 2018

Inheritance Tax is widely viewed as unfair, and even the Chancellor agrees it’s complex, but only effective and early planning can minimise its impact on your estate.

‘Well overdue’ would have been the response of many to news that Chancellor Philip Hammond has asked the Office of Tax Simplification (OTS) to review Inheritance Tax (IHT) with a view to simplifying the regime. In writing to the OTS, he acknowledged that, “IHT, and the system within which it operates, is particularly complex.”

Currently, if your net estate is worth more than the standard nil-rate band of £325,000, 40p tax is charged for every pound that exceeds the threshold. Broadly, if you leave your main residence to a lineal descendant, £100,000 is added to that total (rising to £175,000 in 2020/21). Unused elements of both allowances are transferrable on death to a surviving spouse or civil partner.

The regime has been criticised for being both complex and discriminatory against those who do not own their own home, those who do not have children, and those who are not married or in a civil partnership.

Even if there is potential to simplify IHT exemptions, it’s probably too much to hope that the tax will be scrapped. After all, a cash-strapped Exchequer seems increasingly reliant on taxing people’s estates posthumously. That said, several governments around the world have convinced themselves that reforming or repealing estate taxes is vital to their political survival.

If Donald Trump’s ambition is realised, the United States will join a growing list of nations where taxing people’s estates is being phased out or abandoned. Sweden abolished the practice in 2004, while Hong Kong and Russia did the same in 2006. In Norway, inheritance and gift taxes were abolished in January 2014.1

By 2022 Britain's Exchequer is expected to raise more than
£6 billion from IHT 2  

IHT is often referred to as a ‘voluntary tax’, and it does seem that inertia or ignorance are largely to blame for wealth ending up in the hands of the taxman rather than surviving family members. The fact is that with some careful planning, those with estates currently worth more than the nil-rate band can legitimately reduce their IHT liability, or possibly pay nothing at all.

Gifts of assets are normally included in the net estate for IHT purposes if they were made less than seven years before death. However, these gifts are ignored if they total less than £3,000 in any one tax year. This means that you can make gifts of up to £3,000 in total in any tax year without attracting IHT. The £3,000 can be given to one person or it can be split between several people. If the exemption is not used in one tax year, it can be carried forward to the next year, potentially enabling a couple to remove £12,000 from their joint estate in just one tax year.

“That money could be used to help with the financial challenges faced by younger family members,” suggests Tony Müdd, divisional director at St. James’s Place. “For example, topping up a child’s pension or Junior ISA could go a long way to providing them with an invaluable head start in life. With the end of the tax year looming, this opportunity could be lost unless action is taken soon.”

Using the 'carry forward' provision, a couple could potentially remove £12,000 from their joint estate immediately.

Those with sufficient surplus income may also want to take account of the ‘normal gifts out of income’ rule – if you make regular gifts out of income and in doing so don’t affect your standard of living, they are exempt from IHT. This exemption is only limited by your personal resources, and the amount of spare income available to give away. However, to reduce the possibility of a disagreement with HMRC, it is wise to seek professional help from a financial adviser or accountant.

While lifetime gifts can significantly reduce an IHT liability, it’s worth noting that if you don't take time to write a valid Will*, your estate will be handled though the laws of intestacy. If you die intestate you will have no control over how your estate is distributed, and rather than everything passing to a spouse or civil partner, a proportion could be transferred to descendants, triggering a potential IHT liability.

“If your children’s share is worth more than the individual IHT threshold, they could be liable to pay 40% tax on anything they inherit over that amount,” says Müdd. “This could be avoided by writing a Will that leaves assets worth up to the tax-free threshold of £325,000 to children with the balance of the estate left to a surviving spouse. But there may be even better options, depending on circumstances, through the use of trusts,” he adds.

“IHT often falls on the ill-prepared and unadvised, that’s why it’s important to seek financial advice, so that all your assets are properly protected.”

Less than a fifth of over-55s have taken action to reduce their potential IHT bill.3


The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise.  You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.

* Wills are not regulated by the Financial Conduct Authority. Will writing involves the referral to a service which is separate and distinct to those offered by St. James's Place.


1 The Worldwide Estate and Inheritance Tax Guide 2017, EY

2 Office for Budget Responsibility, March 2017

3 Prudential, May 2017



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