The Conservative party is reportedly contemplating a commitment to initially reduce and eventually eliminate the inheritance tax as part of their strategy to garner more votes in the upcoming election. Currently, only 4 percent of families are subject to inheritance tax, but the total revenue from this tax has significantly increased due to stagnant thresholds and the surging property market, ensnaring a larger number of bereaved individuals in its grasp.
So what is inheritance tax?
Inheritance tax is the tax your heirs pay when they inherit from your estate. The threshold for inheritance tax is 40% on anything over £325,000. This is extremely high in comparison to other countries across Europe, with the UK public completely fed up with IHT laws. According to the most recent data from HMRC for the period from April to August, inheritance tax payments amounted to £3.2 billion, marking a £300 million increase compared to the same period the previous year. In an effort to address inheritance tax and its overwhelming unpopularity, the Tories are exploring potential reforms, which they may unveil at their imminent party conference. Furthermore, there is speculation that Prime Minister Rishi Sunak might commit to maintaining the widely popular triple lock mechanism, which determines the annual increment of the state pension.
How much inheritance tax do you pay?
As mentioned, the threshold for inheritance tax is 40% on anything over £325,000. This means anything under £325,000 will be exempt from inheritance tax, whereas, anything over will be taxed by 40%. Furthermore, the threshold is £650,000 when in a marriage or civil partnership. However, a substantial allowance can extend this threshold to a combined £1 million if you have a partner, own property, and plan to bequeath assets to your direct descendants. Once an estate exceeds £2 million, this additional home allowance starts to diminish, reducing by £1 for every £2 above this limit, and it completely vanishes at £2.3 million. If your net worth surpasses this amount, your heirs will be required to surrender 40 percent of the assets exceeding these thresholds to the government.
How can you legally evade inheritance tax?
As heir hunters, we come across numerous estates where inheritance tax must be paid. Inheritance tax can be an enormously burdening, especially if you don’t have the money to pay as IHT must be paid up front. Blanchards cover inheritance tax for clients signed up with us then take back what we paid form the estate. However, what if you do not have an inheritance company to aid with inheritance tax? Lets breakdown some of the ways:
- Annual Gift Allowance: You can gift up to £3,000 each tax year without incurring inheritance tax. This is known as the “annual exemption.” You can also carry forward any unused annual exemption from the previous tax year, but only for one year.
- Small Gifts: You can make unlimited small gifts of up to £250 per person per tax year. This is useful for spreading your gifts among multiple beneficiaries.
- Wedding and Civil Partnership Gifts: You can give gifts on the occasion of someone’s wedding or civil partnership ceremony. The amount you can give depends on your relationship to the recipient: £5,000 for a child, £2,500 for a grandchild or great-grandchild, and £1,000 for anyone else.
- Gifts Out of Income: Regular gifts made out of your income, which do not affect your standard of living, can be exempt from inheritance tax. It’s important to document these gifts to demonstrate they are part of your regular pattern of giving.
- Gifts to Charity: Gifts to registered charities or political parties are usually exempt from inheritance tax.
How will the government reform inheritance tax?
- Increase the Threshold: The nil rate band, which has remained stagnant at £325,000 for an extended period, received a boost of an additional £175,000 per person for those leaving property to their direct descendants, a measure introduced by former Conservative Chancellor George Osborne. One potential solution could involve simplifying the property-related regulations and instead elevating the nil rate band to £500,000 or even £1 million for married couples.
- Revise Gifting Regulations: The existing gifting rules are intricate, and the annual tax-free allowance of £3,000 has remained unchanged since 1981. A recommendation from the government’s independent tax experts for reforming inheritance tax gifting rules was made four years ago, yet no action has been taken thus far.
- Reduce the 40 Percent Rate: There is contemplation regarding reducing the primary tax rate, exploring the possibility of implementing a new tiered system or sliding scale.
- Complete Abolition: Although this option may be deemed financially unfeasible and potentially viewed as an excessive benefit to wealthier families, the Conservative party might pledge to work towards the ultimate elimination of inheritance tax in the long run.
In conclusion, we must wait and see with what the conservative party decides. Could this be a ploy to garner more votes? Or is this a genuine solution to a highly unpopular law? For more articles like this, please read our other blogs and follow us on LinkedIn.