IHT – the ultimate wealth tax
In my previous update I mentioned that I would explore some of the Personal Finance implications of a shift of emphasis away from the taxation of income and towards taxing assets and wealth. The ultimate wealth tax is the Inheritance Tax, or IHT for short. A few years ago IHT was commonly regarded as being “voluntary”, inasmuch as it was generally perceived as being pretty easy to avoid. The great and the good could employ various trust or business-related strategies to avoid the worst ravages of this attempt to take a second bite out of a lifetime of taxable earnings. Most of the rest of us were unaffected as the thresholds were proportionally higher in real terms.
Things aren’t as straightforward anymore. While the Conservatives pledged to raise the inheritance tax threshold to £1 million, the promise has gone the way of many political sweet nothings and the current £325,000 threshold has been frozen until at least 2018/2019.
IHT revenues have been rising steadily, bringing in £3.4 billion last year, an increase of around 10% on the previous year’s take.
The frozen threshold, and rising house prices, mean that more and more estates are falling into the clutches of the tax. At the same time HMRC is seeking to limit the extent to which trusts can be employed to circumvent the tax.
What this is likely to mean is that the only effective tool for limiting the vulnerability of your estate to inheritance tax is to give away your assets while you are still alive. Even this is not entirely straight-forward because a) it simply passes on the problem to a future generation and b) while you might avoid IHT, there are often capital gains tax implications when assets are given away or sold.
All of this will require detailed (and expensive) financial advice with considerably less scope for your advisors to come up with something “special”.
One possible consequence though is that it will provide an additional incentive for people to downsize their homes in good time, while also keeping a more careful eye on the capital gains implications of any investments they might have.