Jeff Lewis contributes to an article about Inheritance Tax in the September 2020 edition of Scottish Field
With the Chancellor on the prowl for ways to meet the cost of the coronavirus pandemic, start considering inheritance tax allowances while you can, writes Peter Ranscombe.
Nothing in life is certain, except for death and taxes, or so the old idiom goes. Inheritance tax is where those two certainties meet.
The tax kicks in if your estate – your property, money and other assets, minus any debts – is valued at more than £325,000 when you die. It will normally be charged at 40% on anything above that threshold.
Yet there are lots of allowances available from the taxman to help reduce the bill for your estate. Some are straightforward; if you leave 10% or more of your estate to a charity, your rate drops from 40% to 36%.
There’s also the rather snappily-titled ‘residence nil rate band’, which comes into play if you leave your main house to your children or grandchildren, pushing the inheritance tax threshold up to £500,000.
Other allowances are more complicated but can be even more beneficial, such as agricultural relief, which applies if your estate includes a farm or woodland. Some agricultural properties can be passed on without having to pay inheritance tax on them. Similarly, business relief can apply at 100% or 50%, depending on the type of company and how many shares you control.
The tax has always been controversial: supporters say it helps to redistribute inherited wealth from the rich to the state so that it can be spread out more evenly for the benefit of everyone; yet opponents decry it as a second grab at assets that have already been subjected to income tax and other levies. It also accounts for only about £5 billion of the £750 billion that the UK Government receives through taxes.
Now, major changes could be on the horizon. In 2018, the-then Chancellor, Philip Hammond, asked the Office of Tax Simplification to review inheritance tax; the second part of its report was published last year and included 11 recommendations, which are yet to be implemented, with the report pointing to the complex links between inheritance tax and capital gains tax.
With Rishi Sunak, Hammond’s successor, now looking for ways to shore up the public finances and pay for his coronavirus support schemes, this autumn’s Budget could well see inheritance tax swinging back into sharp focus.
Alix Storrie, head of tax and succession at law firm Turcan Connell, says: ‘If there’s time for civil servants to look at legislation then we believe changes are almost bound to happen.
‘For agricultural and business property reliefs, we already have 100%, so it’s not going to get any better – if it does change then it’s probably only going to get worse.
‘Even if people have looked at their inheritance tax position in the past, now is not the time to rest on your laurels and assume whatever reliefs you’re currently entitled to will still be around at the relevant time.’
Angus Kerr, regional director at Rathbone Investment Management, agrees. ‘Politically, I don’t think it would be a vote winner for the government to raise inheritance tax, although I know historically it’s been as high as 80%, so double what it is today,’ he says.
‘The outliers are agricultural relief and business property relief, where 100% is available, so those could change.’
While traditional ways of planning for inheritance tax have included setting up trusts, other options have become available over the years.
‘In the past ten years, the majority of inheritance tax has revolved around business property relief (BPR) schemes,’ points out Jeffrey Lewis, a director at independent financial planning firm RobMac. ‘In other words, taking out a product from one of the bigger providers, which is basically investing in private limited companies.
‘They have become the mainstay and are incredibly useful structures for reducing the liability over two years, when traditionally it would have been seven years.’
INHERITANCE TAX IN NUMBERS
£325,000 The threshold above which inheritance tax is usually charged
£500,000 The threshold once the main residence allowance is included
36% The inheritance tax rate if 10% or more of assets are left to a charity
40% The standard inheritance tax rate
7 If you die within 7 years of giving a large gift, the recipient may have to pay inheritance tax
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