IHT Planning

Talking about Inheritance Tax (IHT) (which we weren’t!) it’s now been almost ten years since the nil rate band (NRB) was changed, staying at £325,000 since 2009.

But we are in a very different world than 10 years ago and the size of many people’s estates has grown dramatically.  It’s no surprise therefore that the amount of IHT being paid has substantially increased.

According to HMRC statistics, the number of people with estates worth over £1m has almost doubled in the last ten years alone, whereas the NRB allowance continues on at the same level

Where are IHT tax revenues coming from?

House price growth is probably one source of this wealth and the fact that we’ve had a bull market for around a decade will only have increased wealth as well.

As a consequence, the Government’s revenues from IHT are predicted to grow in an almost linear fashion.  Nevertheless the Government is pondering inheritance tax simplification

So why reform the system?   Isn’t more IHT a good thing for the Government’s coffers ? Greater revenue to go on schools, hospitals etc.  But,  is it right that, after working all your life and paying taxes, your estate might need to be broken up on death to pay yet another tax?

Particularly when the NRB allowance doesn’t increase and hence becomes more and more irrelevant.

But what’s the answer? Indexation of the NRB in line with inflation, as is planned to happen from April 2021, would at least be a start; perhaps an even better way would be to link it to average estate size.

IHT has a number of exemptions, perhaps the most useful being the normal expenditure exemption. This allows regular gifts to be made out of income and, provided that the gifts do not reduce the donor’s usual standard of living, there is no limit to the amount that will be immediately exempt.

There is no need to wait for seven years and the amount that can be given away each year can increase as excess income increases.  But what if gifts have to be made from capital, not income?

The NRB is available during lifetime, not just on death.  With forward planning, it can effectively be recycled by gifting capital every seven years.  Using this strategy can remove a great deal of wealth from the estate very tax efficiently.  But, in an uncertain world, can taxpayers afford to give assets away?

The reality is that the market is finding workarounds to the limitations of the NRB. Trusts are a particularly common solution. Used the right way, these can often serve two masters – potentially allowing access to capital while creating a timetable to have funds outside the estate within a set period.

With an increasing lifespan, many clients are right to be wary of entirely signing away their estate beforehand, no matter the IHT efficiencies. Discounted gift trusts, flexible reversionary trusts and gift and loan trusts all offer some trade-off between IHT efficiency and access. Depending on the clients’ needs, these can help ensure an IHT strategy that suits their needs.