6th July 2015
Nearly half of Brits believe that Inheritance tax is the most unfair tax, suggesting that the Government’s plan to introduce an extra relief for passing on a family home could prove popular.
The survey of 2,000 people by NFU Mutual over the weekend revealed that 47% of respondents picked IHT as the least popular tax ahead of other common taxes like Income Tax, Capital Gains Tax and Stamp Duty. Council Tax (13%) was a distant second in the unpopularity stakes.
Respondents were also asked which taxes they would like to see reduced and Income Tax and VAT both came top. They were also asked which taxes should be increased and Capital Gains Tax was the most popular choice.
Stephen Berry, chartered financial planner at NFU Mutual, said: “Inheritance Tax is deeply unpopular as people want to be able to pass on as much as they can to their loved ones.
“However, there are many exemptions which means, with fairly straightforward financial planning, people can make the most of their money. The Chancellor is already expected to help families pass on up to £1m to the next generation, although this could make the tax even more complicated than it is now. Whether this proposed change makes it any fairer in the eyes of the public remains to be seen.”
In an article in the Times on Saturday, David Cameron and George Osborne confirmed the Tory manifesto pledge to introduce an additional “family home” inheritance tax-free threshold of £175,000 per person. It is understood this will be announced in the Budget on Wednesday and will be introduced from April 2017.
When added to the current IHT threshold of £325,000 and then combined for married couples and registered civil partners, it will enable up to £1 million of estate value to be passed on free of inheritance tax.
However, Hargreaves Lansdown, the adviser, warns that providing a tax break on the family home will encourage people to plough more into property and discourage downsizing. To reduce this risk, it is understood that people who downsize will receive “credit” in the IHT calculation for doing so, essentially maintaining the value of the tax-free status of their family home IHT allowance, based on the value of their original home.
Danny Cox, chartered financial planner at Hargreaves Lansdown, says: “The tax system is crying out for simplicity and its nonsense to give with one hand and take with the other. It would be far fairer and easier to simply increase the IHT threshold to £500,000 to cover all assets, not just the family home. This would remove the risk of further inflating a property bubble and avoid creating additional work for beneficiaries and executors.”
How much inheritance tax might be paid?
Five-step inheritance tax action plan:
Prior to implementation in April 2017, inheritance tax free thresholds remain the same. Here is our Hargreaves Lansdown’s five point action plan to reduce inheritance tax and keep wealth in the family ahead of the changes in two years’ time:
1. Ensure your will is up to date
A properly drafted will provides clear instructions, which makes life easier for those you leave behind. It can also save inheritance tax by ensuring that legacies are passed on as tax efficiently as possible. With all the changes to the inheritability of ISA, pensions and soon to be, the family home, it is important to review your estate plans regularly.
2. Pay into a pension
In addition to tax relief on the contributions and almost tax-free growth, pensions are no longer subject to inheritance tax. The value of a defined contribution pension plan such as a stakeholder or SIPP is tax-free on death up to age 75 (assuming no Lifetime Allowance issues) and beneficiaries pay marginal rate income tax on death post age 7.
3. Make gifts to reduce your taxable estate
The government limits exempt gifts, those which are immediately free from inheritance tax, to avoid excessive “death-bed” planning. In the main, exempt gifts slow the growth of the taxable part of the estate, rather than significantly reducing the overall IHT liability. That said they remain an important part of the planning. Exempt gifts include the annual exemption of £3,000 a year, gifts of up to £5,000 on marriage and unlimited gifts from excess income. Gifts can be made direct or into trusts or investment schemes such as Junior ISA or Junior SIPP.
It’s important to make sure you don’t give too much away.
4. Invest in inheritance tax free assets
Certain assets are free from inheritance tax after a two year holding period under Business Property Relief provisions. These include qualifying AIM stock, shares in certain unquoted companies and shares in Enterprise Investment Schemes. Liquidity is often an issue with investments of this type and investors should be careful not to let the tax tail wag the investment dog.
5. Charitable giving
Gifts to registered charities are free from IHT and providing these gifts total 10% of the taxable value of an estate, will also reduce the rate of IHT from 40% to 36%. Investors can also gift shares or funds to charity without incurring capital gains or income tax charges and the value of the holdings will also be IHT free.