Larger estates in the UK are paying half the effective inheritance tax rate of many smaller estates, a freedom of information request has revealed.
The figures from Canada Life show that estates worth £10m ($13m, €11.7m) or more pay, on average, just 10%.
This compares with the roughly 20% paid by those worth between £2m and £3m.
Taking the bull by the horns
The deep inconsistencies in the way different assets are taxed for inheritance purposes leads to similarly sized estates paying wildly different rates of tax, the insurer said.
The main reason for this is the composition of the estates.
For example, larger estates typically have a much smaller percentage of their value in UK residential property (10%), which doesn’t have high levels of tax efficient exemptions.
But they also tend to have a much higher amount in securities (40%), which can attract 100% tax relief.
For Neil Jones, wealth management and tax specialist at Canada Life, it is often down to a “willingness to plan”.
“There is a myriad of potential solutions in an adviser’s kitbag to help mitigate IHT and some smaller estates can certainly benefit from these to reduce the tax payable and increase the wealth being passed on to future generations.”
Jones flagged up the “taboo” of talking about death as a major barrier to discussing estate planning. “But it needs to be talked about.”
Levelling out an uneven playing field
The complexity of UK tax law is at the heart of most of the inconsistencies and Jones believes that “some aspects of inheritance tax are ripe for reform”.
“As it currently stands, some forms of equities bought just two years before death attract 100% inheritance tax relief.”
This relief was intended to prevent a business being sold when the owner dies, Jones explained. “Not everyone will want to adopt high risk strategies with savings built up over a lifetime at a time they could be considering using these to supplement income in retirement.”
He continued: “In our view, IHT needs to be simplified. The basic principle is simple; however, the piecemeal nature of the regulations can make it an uneven playing field.
“It will be interesting to see the second paper form the Office of Tax Simplification, looking at reliefs, when it is released in the Spring and what it recommends,” Jones said.
