Finance September 2014

Examining UK Inheritance Tax

A guide to the most emotive tariff

  • Levied on an individual’s global assets, regardless of residence
  • Tax liabilities can be cut while planning for the unforeseen
  • Seeking advice can provide security and reassurance

Many UK expatriates are unaware that they are more than likely to remain UK-domiciled irrespective of their time spent overseas. In addition, most are oblivious of the fact that UK inheritance tax (IHT) is levied on an individual’s global assets including personal items, no matter where they reside.

It is imperative that the correct advice is sought, and prior plans are made, to reduce or negate the potentially damaging effect on your wealth following the death of a family member.

This is particularly important given that IHT is charged at 40% on the value of the individual’s net worth over and above their individual nil rate band, with a threshold of £325,000 for an individual, and £650,000 for a couple in a marriage or civil partnership.

Recent data from the Office for Budget Responsibility—an official independent fiscal watchdog—suggests that revenues gleaned from IHT are expected to rise 11% in the next four years.

Indeed, with the UK property market currently enjoying a boom, the number of estates large enough to pay IHT is forecast to increase to one in 10, increasing receipts 70% to £5.8bn.

The government’s recent proposal to “accelerate payment” of inheritance tax, and a political decision not to increase the threshold until 2018 at the earliest, mean the omens are not good for those whose estate is valued over the nil rate band.

Estate planning can be defined as passing your estate to your loved ones in the most tax efficient way. This process can be complex and time consuming, depending on the circumstances of the individual.

Retaining control over your wealth can sometimes be a trade-off between reducing your future tax liabilities, and ensuring that your nearest and dearest are protected in the event of your death.

Given that we do not know when the end will come, it is particularly important to ensure your standard of living is not at risk should anything unforeseen occur.

Invariably, a number of solutions are required to make sure you have a comprehensive strategy designed to protect your wealth and allow it to grow in the most tax-efficient way. Sadly, there is rarely a magic wand in financial planning, and least of all in estate planning.

So what should you do? It really is a question of what an individual wants to achieve.

Who would you like to benefit from your estate and when? Would you like to start giving some of your assets outright, or would you rather retain some control? Would it be prudent to start reducing the size of your estate through giving or, better still, spending your money? 

Fundamentally, IHT mitigation revolves around striking a balance for today and tomorrow. There are four important steps to consider when planning one’s estate.

1. Consider placing assets in trust. There are a number of different trusts that could help you plan for the future while killing two birds with one stone: providing an income in your later years and reducing the size of your estate. Trust law is robust, tested and viewed as prudent by HM Revenue & Customs and other governing bodies. As the old saying goes, “don’t place your trust in money, place your money in trust”.

2. If you have not made any gifts in the last seven years, consider using your allowances. Don’t forget business and agricultural property relief provides a more specialist solution, regarding which specific advice must be taken.

3. Gifts to loved ones can be effective for IHT planning, providing they are outright. In addition, care must be taken when you spend your wealth, as one does not know how long one is going to live.

4. If, after strategically planning your estate, you still have an IHT liability, then a whole of life policy will provide a means of covering any tax liability on the estate. Ensuring that such a plan is written into trust means monies fall outside your estate for IHT.

It is imperative that individuals plan early. By establishing what you would like to achieve, looking at the big picture and reviewing your options, you can provide security and reassurance for your family with the creation of a robust strategic financial plan.

In the words of Benjamin Franklin, one of the founding fathers of the US, “don’t put off until tomorrow, what you can do today”.