With Inheritance Tax liabilities statistics just released and tax rises confirmed at the autumn budget on 30th October, Liz Colfer, associate director and chartered financial planner at Five Wealth, discusses the impact of HMRC’s latest annual Inheritance Tax statistics under the new government.
Following the Inheritance Tax liabilities statistics commentary announced by the government, the first and most important point to say is that there is nothing surprising in there, with increases to both the number of estates paying IHT (up by 3% to 27,800) and also the total IHT receipts (up by 4% to £5.99bn). Clearly IHT is a big money-maker for the government, but actually drilling down into the details published, the exemptions and relief make the total receipts much lower than they could be.
Taxation:
When considering taxation, we often find that people are focused on those headline tax rates – e.g. IHT at 40%, capital gains tax at 10%/20%, income tax at 20%/40%/45%. However, the statistics published on IHT clearly demonstrate the impact on keeping tax allowances unchanged (those stealth taxes). The nil rate band has been set at £325,000 since 2009/10, so it is no surprise that IHT receipts are often up year on year when assets are likely to have grown significantly over this period and are now at their highest level on record. The residence nil rate band introduction did stem the increases for a while, but with the statistics relating to the second year of the band being at £175,000, we’re already seeing the impact this has.
IHT planning for clients:
When discussing IHT planning with clients, the main issue we face with a change in government is uncertainty. This naturally can bring nervousness and worry and it’s our role as advisers to help clients through this. Whatever the legislation, certainty would bring around the ability to implement plans and see these being followed through, rather than having to be ripped up completely and restarted. Of course all plans, particularly IHT plans which are (for the sensible ones out there) going to be multi-decade projects, will need to be flexible and regularly reviewed, but when this hard-earned wealth is often net capital and we’re talking about a second taxation (after paying income tax or capital gains tax during your lifetime) you can see why people become so emotive. Often, all they want to do is pass their legacy onto the next generation.
IHT receipts:
When looking at the shape of IHT receipts, it’s interesting to see that the highest effective rates fall on estates between £3m and £4m (effective rate of 25%). These estates are not able to claim the residence nil rate band which will have fully tapered down by this point, and often do not have assets that qualify for exemptions like some of the larger estates do (such as business assets) – for estates of £10m this effective rate has reduced to 20%. It is really those ‘middle’ estates where effective planning can have a huge impact, and these are the types of clients we have built successful plans for over the years.
Financial planning for all:
The FCA reports just 16 per cent of financial advisers in the UK are female, so for me personally as one of these, it was interesting to hear about the larger liability that often falls on female owned estates. The main reason cited for this was due to the average life expectancy being greater, and so with a married couple that includes a woman, on statistics alone she is likely to end up with the IHT liability (assuming that all assets are passed to the surviving spouse on first death). This brings home the importance of engaging all family members with financial planning, and particularly engaging women with the process, something I am actively vocal about with clients that I work with.
