Is Inheritance Tax A Voluntary Tax?

The former Chancellor of the Exchequer Nigel Lawson once said, 'inheritance tax is a voluntary tax – you can either do nothing and volunteer (for your beneficiaries) to pay it, or you can take steps to avoid it’. According to HM Revenue and Customs, inheritance tax (IHT) receipts hit £5.3bn in the year to November 2017, up from £4.7bn for the whole of 2016,  as an increasing number of estates fall within its scope.The nil rate band has increased over the years but it has been frozen at £325,000  since 6th April 2009. (Chancellor now confirmed the NRB frozen till April 2028)

No inheritance tax is charged on the nil rate band (currently £325,000 per person) of someone's estate (the value of their total assets they leave behind when they die). The nil rate band has increased over the years but it has been frozen at £325,000 since 6th April 2009. With the rise in property prices and the increasing value of other assets over recent years, this has meant that inheritance tax is no longer just a tax on the wealthy.

When the first partner of a married couple or civil partnership dies, everything normally passes to the surviving partner free of inheritance tax, via the spouse exemption. The survivors nil rate band is uplifted by the unused percentage of the deceased nil rate band. This is known a the 'transferable nil rate band'. Unless the deceased had bequeathed assets to anyone other than their partner, or made substantial gifts during their lifetime, the survivors nil rate band is increased by 100% (to £650,000, based on the current nil rate band).

What this means is that couples can leave an estate worth £650,000 (singles, £325,000) without attracting any inheritance tax. 

Further, in what was one of the major IHT reforms of another former Chancellor, George Osborne, 2015’s summer budget came into action on 6th April 2017, launching the 'residence nil rate band' (RNRB). This exemption is in addition to the standard nil rate band and includes the following features and conditions:

• Its only available on a main residence.

• The beneficiary of a home (or sale proceeds) has to be a direct descendant (classed as children, step-children, adopted children, fostered children, grandchildren and their spouses or civil partners). Nephews and nieces don't count. 

• To help protect the RNRB, downsizing provisions apply if the deceased had sold their home (either downsized to a less valuable home or ceased to own a home) on or after 8th July 2015.

• The RNRB is tapered away for estates worth more than £2 million, reducing by £1 for every £2 that the value of the estate exceeds £2 million.

• It was a gradual increase. It started at £100,000 (per person) on 6th April 2017, and rose to £175,000 from 6th April 2020 onwards.

So, the potential total IHT free allowances will depend on the circumstances and when someone dies (typically on second death for a married couple or civil partners) as follows:

• 6/4/2020 onwards: £500,000 (£325,0000 plus RNRB £175,000) per person and £1million for a married couple or civil partners.

The £1million threshold relates back to former Prime Minister David Cameron's Tory promise to raise the IHT threshold to £1million, although this won't apply to everyone, as it depends on the circumstances and conditions outlined above. Beyond these thresholds, with a few exceptions including gifts to charities and political parties, inheritance tax is charged at 40% on the excess.

Is there anything you can do to mitigate the taxable excess?

There are many planning options available for you to reduce or eliminate any future liability to inheritance tax. Many people think that you need to give assets away and survive for 7 years to address this, but there are many ways that you can address this sooner and you don't have to give your money away!  This is especially important for people who are concerned about giving capital away too soon, or depriving themselves of income they may need in the future.

So don't delay and seek advice by contacting the experts at Chester Financial Wealth Management - we've been advising on inheritance tax planning solutions for over 25 years.

This information was correct on the date it was written but should not be relied upon to make important financial decisions. The Financial Conduct Authority does not regulate Inheritance Tax Planning.