Inheritance Tax - A Voluntary Levy?
Benjamin Franklin once said “There are only two certainties in life - death and taxes.“ Though this quote was made years and years ago, it is without doubt as true today as ever it was. Inheritance tax is the place where these two great certainties meet head on.
Whilst IHT is a progressive tax, that is to say the the larger the Estate the greater the liability to IHT, many consider IHT to be more of a voluntary levy. Indeed, Labour politician Roy Jenkins in 1986 famously said “Inheritance Tax, is broadly speaking a voluntary levy paid by those who distrust their Heirs more than they dislike the Inland Revenue.”
Whilst this may be a slight exaggeration, there is certainly no need to pay more IHT than you absolutely have too and with the benefit of careful planning IHT can certainly be reduced or mitigated completely.
Inheritance Tax was introduced in 1986 and was the brainchild of the then Prime Minister Margaret Thatcher and her Chancellor Nigel Lawson. It was broadly similar to Capital Transfer Tax which it replaced, the the predecessor to Capital Transfer Tax was known as Estate Duty.
Prior to the General Election in 2010 the Conservatives had pledged to increase the nil rate band to £1m. This plan was scrapped when the Coalition government was formed and since then the same Coalition government acted to effectively freeze the nil rate band at £325,000 until 2015/2016. However, as with the best laid plans, it has now been agreed that the Inheritance Tax Nil Rate Band will remain at its current level up to and including 2017/2018.
Breaking News 19/03/2014
The Budget speech of March 2014 has exempted Emergency service workers who are killed in the course of duty. This brings the IHT rules for Emergency wokers in line with similar rules for military service personnel that exempt their estate from IHT while they are actively serving.
How does IHT work?
It's really quite simple – when you die, whatever you’ve got, wherever it’s been hidden, if the HMRC finds it, IHT is potentially chargeable at a flat rate of 40% of the asset value. Broadly speaking IHT is payable on death though contrary to common belief it is important to note that it is actually a "transfer of value" that creates the potential liability - not death itself. Therefore, in certain situations IHT could actually be due during your lifetime.
What is a Transfer of Value?
A "transfer of value" takes place when you dispose of an asset that would effectively reduce the value of your Estate. There are various exemptions in the place that ensure that whenever you pay your electricity bill or buy your groceries for example that a liability to IHT is not automatically triggered, however, if you transferred say a valuable painting or a substantial gift to another individual, that could potentially lead to a liabilty to IHT.
At what rate is IHT charged?
The answer is currently either at 0% or 40%. The first £325,000 of your estate is actually taxed at 0%. So why refer to it as taxed at 0% rather than tax free? Again, the answer is simple. By referring to it as being taxed at 0%, it is recognised as a taxable band, and therefore taxed accordingly at 0% under current rules. It certainly isn’t tax free. In practice, what this means is that at any Budget, the Chancellor could announce that with immediate effect, the first £325,000 of your estate will now be taxed at 5% or 10%, or any figure he cares to choose. This is foreplanning by the tax man.
When is Inheritance Tax due to be paid?
When Inheritance Tax is due there are certain timescales in which the bill must be paid, and in the case of the liability falling due to the event of death, the bill is normally paid within 6 months of the date of death.
How much IHT might my Estate have to pay?
To give you an idea of how much Inheritance Tax your Estate may have to pay after your death, just add up the total value of all of your wealth. That means your house, your car, your investments, any life assurance which you may not have written in trust; basically everything.
Try our IHT Calculator to give you a rough idea of how much tax your estate may need to pay.IHT Calculator