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Intensifying Tax Squeeze on Bereaved Families

Inheritance Tax Bonanza for HMRC

A 23% spike in Inheritance Tax receipts is being blamed on frozen allowances, rising house prices and more aggressive tax collection.

The Inland Revenue is currently seeing an exceptional rise in Inheritance Tax receipts at the expense of bereaved families. In the nine months to January 2018, HMRC collected an extra £2billion, a 23% increase on the same period a year earlier.

What’s going on?

Experts are putting this surge in Inheritance Tax receipts down to several factors.

House prices, traditionally the main driver of rising Inheritance Tax receipts, have risen boldly in the decade since the 2008 crash, so an increase in receipts is only to be expected. But not as great an increase as this. This 23% leap coincided with a slowing-down of the rate of house price inflation.  

The basic Inheritance Tax allowance – the Nil Rate Band – has been frozen at £325,000 per person for nine years. During this time, house price inflation has taken ever increasing numbers of ordinary families into Inheritance Tax liability, a tax bracket historically reserved for the wealthy. Back in 2015, George Osborne responded with a vote-winning plan, particularly benefiting homeowners in London and the Home Counties. April 2017 saw the introduction of his brainchild, the Main Residence Nil Rate Band, which is an extra Inheritance Tax allowance exclusively for parents leaving the family home to their direct descendants.

We are now a year into the phasing-in of this new allowance, which currently stands at an extra £125,000 per person and will come into its full value, of £175,000 per person, in April 2020. But its late introduction on the back of an eight-year freeze, combined with its slow phasing in and relatively modest scale as compared to the rise in house prices, has muted its effect and allowed the HMRC Inheritance Tax grab to continue.

The main cause of the spike in receipts appears to be more aggressive tax collection. HMRC previously warned it would take a more aggressive stance on Inheritance Tax collection, and the recent surge in receipts appears to be evidence that they are making good on that warning. Financial experts and lawyers are notifying a more hard-line approach by the HMRC in scrutinising Inheritance Tax returns and challenging claims for reliefs. Inheritance Tax is one of the more complex taxes and there are plenty of traps for the unwary taxpayer to fall into.

Sadly, HMRC are being helped in their mission by taxpayers themselves. Far too few families carry out any form of financial planning to minimise their exposure to Inheritance Tax.  Because Inheritance Tax has traditionally been viewed as a tax on the rich, many people who regard themselves as financially secure, but not exactly rich, simply don’t realise that their deaths will trigger a substantial tax lability if they don't do something about it. Consequently, they fail to obtain the right advice. It’s a shame, because there are so many knowledgeable and trustworthy professionals out there, just waiting to show taxpayers how to minimise their exposure.

How to Respond

The first step is to know where you stand. It’s important to have a clear understanding of your net worth for Inheritance Tax purposes.  The key to understanding this is to seek quality estate planning advice. A skilled estate planner will help you predict what your Inheritance Tax liability is likely to be, based on your current assets, and then lay solid foundations with a well-thought-out Will.

If your capital is mainly tied up in land – for example the value of your home or your buy-to-let portfolio – your Will is going to be your most useful tool in managing your Inheritance Tax exposure. The same is true if you are self-employed and your net worth is founded on the value of your business.  

If a significant proportion of your capital is in savings and investments, an independent financial advisor of chartered financial planner will be of invaluable help, because there is such a wide – and confusing – range of investments available for shielding your capital from Inheritance Tax exposure.

For quality estate planning advice, simply fill in the contact form below or call us on 0151 601 5399. Our consultations are free of charge and are followed up with clear written advice that you can use as the basis for informed and confident decisions. 

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