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.

  • Vicky says:

    Hi Pensionman

    Very pertinent posts, thank you!

    Just wondered if you could give us a very brief summary table of what the rates for CGT and other forms of tax are so we can get the whole tax issue into proportion for our individual circumstances? It might shock the more financially “heads-in-the-sand” amongst us into defensive action!


  • Pensionman says:

    Thank you for your kind comments, and yes I will clear the encyclopaedias off the dining table when I get home.

    Unfortunately the subject of capital gains tax (CGT) is neither easy nor straightforward. Essentially though each of us has an annual allowance of £11,000 (2014-15), up to which gains are essentially tax free. The rate for taxable capital gains beyond this allowance depends on an individual’s total taxable income (told you it wasn’t straightforward). If you pay no income tax, or pay tax at the basic rate, then CGT rate is 18%. Beyond that it is 28%.

    However, even if your income is relatively modest in any given year, you may still end up paying 28% CGT on a portion of your capital gain if it pushes you above the threshold for higher rate income tax: i.e. taxable income in excess of £31,865.

    In terms of inheritance tax, the value of an estate in excess of £325,000 (£650,000 for the survivor of a married couple) is taxed at 40%. By necessity this is a very simplified example and there are numerous wrinkles and complications. It is essential to obtain expert financial advice with regards to tax planning. However, by way of example, imagine a divorced person living in a house valued at £900,000 with no other assets. Subtracting the £325,000 allowance leaves £575,000 to be taxed at 40% for an IHT tax bill of a staggering £230,000.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Subscribe to Blog via Email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Follow me on Twitter