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Summer Budget 2015: Saving the wealthy from record IHT rates?

Last week, it was revealed that HM Revenue & Customs took in a record £379m worth of inheritance tax (IHT) in April, but with the Tories today confirming a more lenient approach to the tax in Wednesday’s Summer Budget, what is the future price of passing down wealth?

Summer Budget 2015: Saving the wealthy from record IHT rates?

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While April’s record figure comes far above the average HMRC monthly IHT take of £260m, experts remain split on whether Osborne’s decision to raise the IHT nil rate band on some estates to £1m is the way forward or an unnecessary over complication.

Confirmed by the Chancellor and Prime Minister David Cameron today in The Times, the tax free amount applied to the value of some estates will rise from £325,000 to £1m in cases where a main residence is being transferred to children or grandchildren by a married couple or civil partners. After £1m, the IHT rate would rise to its normal 40%.

Also significant is the proposed inclusion of a taper of the relief on estates worth between £2m and £2.75m, which would see the rate increase to 60% before returning back to 40% on anything worth over £2.75m.

The promise was drilled into the Tories 2015 General Election manifesto and has been subject to widespread discussion, including a House of Commons Library briefing paper.

For those lucky enough, for want of better term, to have their death surrounded by this new found leniency, it represents the first change to the nil rate band since it was frozen at £325,000 in 2009.

However, for those who do not have their wealth stored up in their family home, benefits from the new proposals are unlikely to be seen.

 290 nheritance tax schedule for widowed individual with a main residence worth at least 350 Inheritance tax schedule for widowed individual with a main residence worth at least £350 (Source: House of Commons Library)

 

 

Fair?

Belinda Watson, a partner at law firm Wilsons, said the government’s proposals add unnecessary complexity to the IHT system, adding that it would be “better and fairer” to raise the nil rate band for all estates.

She added that the measures could unfairly disadvantage childless couples, who will be subject to another £140,000 in IHT compared to the estate of a couple with children.

“There is also a worry that the cost of allowing this more generous relief to certain homeowners may start to put pressure on existing, hugely important inheritance tax relief; such as agricultural property relief which helps farms remain viable across generations; or business property relief which is essential to encourage business owners to keep investing in their business.”

Is IHT planning a reality?

Gerry Brown, technical manager at Prudential, welcomes the changes, putting the record rise in IHT take down to the general increase in the spending power of money across the UK in recent years, coupled with a static IHT nil rate band.

“The IHT nil rate band has been frozen at £325,000 since April 2009 but it is clear that there has been significant wealth inflation since that time,” he said. “In the same period, the FTSE 100 has more than doubled and the average UK house price has increased by nearly 30%. Wealth growth in London and the South East has greatly exceeded the national average.”

The contrast between the rate of inflation and the sturdy base rate of IHT has lead the Office of Budget Responsibility, an advisory body established by the UK Government to provide independent economic forecasts, to estimate that 9.9% of estates will pay IHT by the 2018/19 tax year.

Brown said that as a result of this, successful IHT planning in respect of the family home, often a family’s most valuable asset, has been difficult due to the reservation on benefit rules in the presence of new wealth.

Similarly, Brendan Harper, head of technical services at Friends Provident International, said the increase in the value of property and investments as the UK recovers from the Financial Crisis, as well as the freeze in the nil rate band, has led more people to be caught in the IHT net.

However, unlike Brown, he saif that many people are paying IHT unnecessarily, and could easily mitigate its effects with a little financial planning.

“Insurance based solutions, whether in the form of a basic insurance policy written in trust, to specialist products such as discounted gift trusts, play an important role in this area, allowing people to access their savings in retirement, but leave their estates intact for their heirs.”

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