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The Conservative Party is reportedly considering committing to initially cutting and ultimately abolishing the inheritance tax in a bid to win votes in the next election.
About 4 percent of families pay inheritance taxes, but incomes have soared because frozen thresholds and booming real estate prices are trapping more grieving people online.
The latest HMRC data for April to August shows inheritance tax payments totaled £3.2 billion, £300 million more than the same period last year.
The Conservatives are therefore considering reforms to what they call “the most hated tax in Britain” that they could announce at their party’s pending conference, according to a report in The Times yesterday.
There is also speculation that Prime Minister Rishi Sunak could promise to maintain the popular triple lock, which determines how much the state pension rises each year.
So how much is inheritance tax, how does it work and what are the best ways to prevent your family from paying it?
And how could the tax be relieved? From complete abolition to reducing the 40 percent rate and increasing thresholds.
How much is inheritance tax and who pays it?
It must be worth £325,000 if you are single, or £650,000 jointly if you are married or in a civil partnership, so your loved ones will have to pay inheritance duties.
But there is another important allowance which increases the threshold to a joint £1m if you have a partner, own property and intend to leave money to your direct descendants.
The inheritance tax is paid by few, but many fear it… It is an overly complex tax that is ripe for reform.
Sean McCann – Mutual NFU
Once an estate reaches £2 million, this home ownership allowance begins to be phased out by £1 for every £2 above this threshold. It disappears completely at £2.3m.
If you are worth more than this, your beneficiaries will have to give the government 40 percent of your assets above those levels.
How do you avoid inheritance tax?
There are many legal ways to avoid the dreaded 40 per cent ‘death tax’ if you want to spend the maximum amount possible and are prepared to plan for the future.
Below are some of the simplest options, but read our ‘Ten Tips to Legally Avoid Inheritance Tax’ for a complete guide.
Gifts: You can donate £3,000 a year, plus make unlimited small gifts of £250, free of inheritance tax.
You can give unlimited sums to other people if you wish, but they will be subject to the so-called seven-year rule.
If you survive seven years, the money is automatically free of inheritance tax. If you die before seven years have passed, inheritance tax is applied on a sliding scale.
| Years between the gift and death | Tax paid |
|---|---|
| less than 3 | 40% |
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | sixteen% |
| 6 to 7 | 8% |
| 7 or more | 0% |
Pension funds: You can pass on your retirement savings to your loved ones.
Beneficiaries currently pay no tax on inherited pensions up to the limit of the deceased’s lifetime allowance if the owner dies before age 75, or their normal income tax rate if they are age 75 or older.
But beware, the Treasury is apparently also considering imposing income tax on younger savers’ inherited pension withdrawals, although there is uncertainty over how the withdrawal from the fund could be treated as a lump sum.
Surplus income: You can also contribute to someone else’s living costs (younger or older relatives, for example), but only if you can prove it comes from additional income.
Such gifts must be made from surplus funds, meaning your beneficiaries may need to show HMRC your old bank statements to prove you didn’t need to spend the money on anything else.
How could the Government reform the inheritance tax?
1. Raise the threshold: The £325,000 nil rate band has been frozen for years and former Conservative chancellor George Osborne introduced the additional £175,000 per person margin for those leaving property to their direct descendants.
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One option could be to ditch the complicated property rules and simply increase the nil rate band to £500,000, or £1 million for married couples, for everyone.
2. Cut the 40 percent rate: A reduction in the general rate or a new tiered system or sliding scale could be considered.
3. Abolish it outright: This is likely to be unaffordable and, given the financial difficulties, seen as too much help for the richest families, but the Conservatives could promise to move towards this goal in the long term.
4. Change the gifting rules: These are complicated, and the annual tax-free allowance of £3,000 has not changed since 1981. The government’s independent tax gurus suggested reforming the inheritance tax gift rules four years ago, but no action was taken.
Read our full summary on the pros and cons of inheritance tax reform.
What do legal and money experts say?
The Conservatives are testing how to build support ahead of the Autumn Statement and an election that many believe they will lose, according to Rachael Griffin, tax and financial planning expert at Quilter.
It is very easy to frame the reform as a gift to the rich, which means that it represents a kind of political gamble, he adds.
He continues: ‘The promise to reduce or even eliminate one of the most hated taxes in Britain and which many perceive as inherently unfair will be music to the ears of many voters.
‘However, amidst the crowd-pleasing ads, there’s bound to be a sprained tail. Britain’s finances do not appear to be on particularly secure footing and income generated by inheritance tax will reach a record £8 billion this year.
‘As the Government navigates the tightrope of public approval and fiscal responsibility, the total abolition of this source of income will create a fiscal hole that must be filled.
“The answer could be equally unpleasant for people and those calling for the inheritance tax to be scrapped entirely may need to be careful what they wish for, as it opens the door to new types of wealth taxes under a future government. “.
Sean McCann, chartered financial planner at NFU Mutual, says: “Inheritance tax is paid by a few, but many fear that cutting the rate or eliminating the tax altogether would be popular with many British households.
‘The freezing of tax breaks has led to more and more families being caught in the net simply due to inflation in house prices.
‘It is an overly complex tax that is ripe for reform. There is an inherent unfairness in the current rules: those without children lose the additional tax-free allowance that can be used against the value of the family home.
“Common-law couples who may have lived together for decades may find themselves with an unexpected tax bill on the first death, as they do not benefit from the exemptions available to married couples or civil partners.”
Ian Dyall, head of estate planning at Evelyn Partners, says: “Many families would welcome a 40 per cent tax rate cut, not least because those who have carefully saved and built up assets will likely have had to pay tax on much of it.” of that amount.” wealth already.
‘Forty pence in the pound is a comparatively high tax which some consider a bit punitive. But while it will reduce the impact of IHT on taxable estates, it will not remedy the trend of more and more families being drawn into the IHT net.
‘IHT is starting to hit an increasing number of relatively modest properties, and as inflation means property and other asset prices tend to rise over the long term, more families – and a greater share of savings of each family – will be pushed to exceed the IHT threshold. Therefore, an increase in the zero rate band would possibly be more welcome.’
Rachel Carrington-Matthews, senior associate at Hedges Law, says: “The likelihood of the tax being scrapped is unlikely, given the hole it would leave in the government’s budget.”
‘Reform, including tax reduction, is necessary to make the system fairer. For example, both the £325,000 nil rate band and the £175,000 residency nil rate band are frozen.
‘The first of these has been frozen for over a decade, since 2009/2010, and none of these permits will be subject to review until 2028.
“In addition, the annual gift allowance – the amount of money you can give to someone while you are alive – has remained at £3,000 a year since 1981.”
“Surely it is time to review and increase these allowances to take into account the rise in house prices since 2009, inflation and wage increases, and the current cost of living crisis that has many older relatives worried about the older generation young”.
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