Inheritance Tax rules could be changing. Here's 10 facts you need to know...

With potential changes in inheritance tax rules on the horizon, Ian Lowes, managing director of Lowes Financial Management, offers some advice

INHERITANCE Tax (IHT) dates back as far as 1694, when it was a duty on probate.

It then took a number of forms, including the Estate Duty introduced in 1894, until it was named Inheritance Tax in the Finance Act of 1986. At its highest, the marginal rate of tax was a hefty 85% of estates in excess of £750,000, with the duty being limited to 80% of the value of the estate.

Originally IHT was a tax on the wealthiest estates in the UK. However, in recent years, many people’s wealth has increased through rising house prices, while the nil rate band has been frozen since 2009, which means more and more people are seeing the value of their estates exceed the nil rate band threshold. With an upcoming election, it is important to appreciate that once more the regulations regarding IHT could be about to change.

• HMRC data shows that in the 2008/09 tax year Treasury’s receipts for IHT were £2.8 billion. In 2018/19 they were nearly double that, at £5.36 billion.
• The Office of Tax Simplification estimates the annual number of tax paying estates is 24,500. This number has been steadily growing since 2009, when the IHT nil rate band was frozen.
• An individual’s IHT nil rate band (NRB), i.e. the amount allowed before IHT is applied, currently is set at £325,000. With house price inflation and growing wealth, more and more people in the UK have become potentially liable for IHT, as reflected in the figures above.
• The basic nil rate band of £325,000 is frozen until the end of the 2020/21 tax year. With the review date so close, unfreezing and raising the threshold could be a reform the chancellor is considering.
• In April 2017 the Residential Nil Rate Band was introduced, which recognised the effect of house price inflation on ordinary estates and added £125,000 to an individual’s NRB, with certain conditions applying, notably that it was only applicable where a home was passed to ‘direct descendants’. The Residential Nil Rate Band for the 2019/2020 tax year is £150,000.
• While money in cash or stocks and shares ISAs is free of income and capital gains tax, many people make the mistake of thinking it is also free of IHT. This is not true. ISA investments form part of your estate for IHT.
• Pension funds usually fall outside of your estate for inheritance tax purposes. Hence, when taking income in retirement, it can pay to first use non pension wealth, such as in ISAs, before taking money from a pension, which can be passed on to beneficiaries without incurring IHT.
• Any unused Nil Rate Band and Residential Nil Rate Band can be transferred between spouses and civil partners to be used when the survivor of them dies. This means such estates can benefit from a combined Nil Rate Band of £650,000, plus another £300,000 Residential Nil Rate Band.
• If you leave at least 10% of your IHT taxable estate to charity your rate of IHT is reduced to 36%.
• You can gift away your surplus income through regular payments free of IHT, subject to certain conditions.

Inheritance tax rules could be about to change – again –any carefully devised wealth succession plans may need an overhaul. Without forward thinking people can find their estates are caught in the IHT net. Independent Financial Advice can help mitigate the effect of IHT on an estate.

To arrange a free initial consultation with a Lowes Consultant by:

Call: 0191 281 8811

Visit: Lowes.co.uk

Email: enquiry@Lowes.co.uk

Source: Investing in a Better World, available at Gov.uk

Lowes Financial Management, Fernwood House, Clayton Road, Jesmond, NE2 1TL. Authorised and regulated by the Financial Conduct Authority.