In the last seven years the amount of Inheritance Tax (IHT) collected by the Taxman has doubled, according to statistics published recently by HMRC. In the year 2009/10 £2,384million was paid over to HMRC in IHT, whilst in the year 2016/17 this increased to £4,835million.
Why the rise?
According to HMRC the increase is down to rising asset values and a higher number of deaths. But there could also be other reasons for this rise in IHT receipts. The generation born in the decade before the second world war was the first to fully embrace home ownership. They have benefitted from the significant rise in property prices and the privatisation of many nationalised industries during the 80’s. This increase in wealth adds to the IHT liabilities.
Don't forget IHT on Trusts
It’s also important to remember that discretionary trusts attract IHT. Individuals often place assets in discretionary trusts to protect them and to maintain control over them. They are not intended as a tax saving vehicle. Every ten years the value of assets in a discretionary trust is subject to IHT. These assets will have been increasing in value. Also when an asset is passed out of a discretionary trust to a beneficiary it is subject to IHT.
Introduction of changes to IHT
The introduction of the additional nil rate band on family homes passed to children or grandchildren may slow down the increase in amounts collected (HMRC suggests this could be reduced by up to £940million per year by 2020/21).
The average UK property value of £215,847* is within the current nil rate band. Owners of London properties which have an average value of £471,742* are already above the existing nil rate band plus the new main residence nil rate band.
Even with the new allowance IHT is going to affect a higher number of families than before. It’s also worth bearing in mind that although property usually makes up the majority of the value of an estate there are often other assets to be considered from classic cars to fine wine and everything in between.
It’s not the deceased who pays IHT, but the beneficiaries of an estate. It is worth considering how to structure your affairs so that your family are not left with an unexpected IHT bill.
* March 2017 values as reported in the UK House Price Index