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The Government has announced that its receipts from Inheritance Tax (“IHT”) in the year to May 2017 exceeded £5 billion for the first time. This is an increase of 9% over the previous year, and continues the trend of receipts from IHT growing by 10% year on year since 2010. In addition, the individual number of estates paying IHT has quadrupled in that period, up from 10,000 to more than 40,000. This means that more than one in 20 families is paying IHT when a loved one dies.
It is thought that this trend is driven by a number of factors, mainly the fact that the Inheritance Tax threshold has remained at £325,000 since 2009 while houses and investments have increased in value significantly in that period.
These figures do not reflect the introduction of the Residence Nil Rate Band (“RNRB”), an additional allowance against IHT which became effective for deaths occurring after 6th April 2017. The RNRB attaches to the family home provided it is left to direct descendants. It was introduced at £100,000 per person for the tax year 17/18; currently it is £125,000 and it is due to increase to £175,000 per person by 2020/21. It is transferable between husband and wife so that ultimately a married couple will be able to leave up to £1m to their children tax free. The RNRB tapers away for estates above £2m.
Because of the limitations of the RNRB it is not expected that it will, in fact, make a big dent in the amount of IHT which is being collected.
These statistics emphasise the need for professional advice on the mitigation of IHT. Many people are aware that if they give away assets and survive 7 years then those assets are outside their estate. However, they worry about being able to afford to make substantial gifts. They are perhaps unaware of the possibility of keeping assets, but within a tax-efficient wrapper.
The other problem which we are seeing with more frequency is where the first of a couple has died having established a discretionary trust in their Will, but the family have not taken tax advice since ordinarily no IHT will be payable on the first death. However, when the second spouse dies it turns out the trust was not dealt with and this can cause problems and additional tax on the second death. There are many permutations of this problem and we are committed to presenting the facts to HMRC in such a way as to maximise the tax allowances available.
Please call our Wills Trusts and Probate department if you are concerned about IHT.