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Raking it in

19 April 2016

Record Inheritance Tax bills in the last tax year are a timely reminder of the need for good estate planning.

It is not just because of David Cameron’s family that Inheritance Tax (IHT) planning has been in the news recently.

Figures released by HMRC confirm that, in the last tax year, the government benefited from IHT to the tune of £4.6 billion1. It is the first time annual revenues have exceeded £4 billion and represents a 21% increase on the amount of tax paid in the previous tax year. The income received by the Treasury from IHT has soared by 70% in the last five years.1

Analysis by the Office for Budget Responsibility (OBR) suggests that the number of estates on which IHT has to be paid has quadrupled since 2010². The OBR believes that more than 40,000 estates will be liable for the tax this year.

The boost to the Treasury’s coffers is a timely reminder of the damaging effect death duties can have on families’ plans to create and pass on wealth, and also that there are perfectly legitimate ways of mitigating IHT through foresight and careful financial planning. The lifetime gifts made to David Cameron by his mother are a case in point.

Heir loss

While most assets have risen in value since 2009, the IHT nil-rate band has remained fixed at £325,000 per person (£650,000 for couples), so it’s not surprising that the number of families paying IHT has risen.

The OBR reports that housing assets now account for around half of the value of estates notified for probate, highlighting the impact that rising property prices have had on IHT receipts

“At the heart of this problem remains the simple fact that IHT is a voluntary tax,” says Tony Müdd, Divisional Director, Tax and Technical Support at St. James’s Place. “The Treasury relies on inertia, ignorance and people’s reluctance to confront the issue. The result is the record level of revenue generated last year, money which could instead stay in the family to support future generations.”

Home help

In his Budget last summer, Chancellor George Osborne announced the introduction of a new main residence nil-rate band for the main home when it is bequeathed to a direct descendant. This new band will add £100,000 to the threshold from April 2017, and will rise in stages to £175,000 in the 2020/21 tax year.

In the meantime, IHT receipts are expected to rise to £5.6 billion per year by 2020/212, despite the concession for home owners.

“The latest figures illustrate the continued threat of IHT,” says Müdd. “The introduction of the main residence nil-rate band will certainly help families reduce their liability to IHT, but it needs to be considered alongside fundamental estate planning such as writing a Will, establishing trusts where appropriate, and making use of annual exemptions like gifting.”

 

1 HMRC, April 2016

2 Office for Budget Responsibility, March 2016

 

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

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

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