Inheritance tax hits record high, does this actually affect you?

Over the last 12 months the amount of inheritance tax paid in the UK reached a record high, hitting £5.1 billion, according to figures from HM Revenue & Customs[1]. This represents a 9% rise from the previous year and it has been put down to growing house prices and a prolonged freeze of the inheritance tax threshold. However, as this tax has historically affected the slightly richer among us, the question has to be asked if this is a real problem for most Brits.

Rising inheritance tax bad news for London

According to experts, in London and the South East, inheritance tax is becoming a burden and more families could find themselves coughing up cash, as average house prices near the half a million mark (standing at £482,779, as of April 2017[2]).

“What upsets people is that this is wealth that is being taxed twice,” Tim Fullerlove, partner at law firm Wilsons, explained[3].

Nevertheless, not everyone thinks that an increase in the number of Brits paying inheritance tax is a bad thing. When changes came in on April 5th to allow an additional allowance of £100,000 to offset the sale of a family home following a death (on top of the existing £325,000 inheritance tax exemption), it was criticised for increasing the North/South divide in the UK. Research from Labour MP Rachel Reeves claimed that of the 100 constituencies benefiting most from the changes, 96 are in London or the South-East[4].

Yet, writing for Forbes in March, Tim Worstall, from the Adam Smith Institute in London, was quick to point out that People in London and the South-East have to pay significantly more for property in the first place[5]. Ian Dyall, head of estate planning at advisory firm Tilney, also told the Telegraph that the recent tax changes aren’t as “generous” as they sound. “Where a first spouse dies leaving everything to a partner – such as family home, Isa portfolios, holiday cottage, artwork, other collectibles and jewellery – more individuals than might be imagined will nudge up against [the inheritance tax threshold],” he said.

Preparing for the future of inheritance tax

What happens with inheritance tax over the long-term depends on who’s in power. With the current Conservative government, it’s likely the threshold will rise in the future, with a Treasury spokesperson explaining that they want to make it easier for more people to pass their home onto their children and thus will continue to reform inheritance tax[6].

However, any future Labour administration may mean the inheritance tax threshold will decrease. In the run up to the general election it was reported that Labour proposed to reduce the inheritance threshold from £850,000 to £425,000 – an idea that received mixed reviews[7].

So what does all this mean for Brits? Well, as you’d expect, the most important thing you can do is create good financial habits to ensure you aren’t reliant on receiving an inheritance tax windfall. This means avoiding getting into debt and saving for the future as much as you can. Read ‘When is it time to get serious about saving for the future?’ to find out more and be sure to check your credit report and score regularly to see the state of your finances.

It might also be a good idea to seek professional advice if you’re unsure as to whether or not you fall under inheritance tax and if you want to understand how to maximise the assets you leave behind.

 

 

 

[1] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/619800/May17_Receipts_NS_Bulletin_Final.pdf

[2] https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/apr2017

[3] http://www.telegraph.co.uk/news/2017/06/21/british-families-paid-record-5bn-inheritance-tax-last-year/ and http://www.thisismoney.co.uk/news/article-4627306/Inheritance-tax-smashes-5bn-barrier.html

[4] https://www.theguardian.com/money/2017/feb/28/tory-1bn-inheritance-tax-cut-will-worsen-north-south-divide and https://www.forbes.com/sites/timworstall/2017/03/01/theres-nothing-unfair-about-a-uk-inheritance-tax-cut/#7c85e2064a6f

[5] https://www.forbes.com/sites/timworstall/2017/03/01/theres-nothing-unfair-about-a-uk-inheritance-tax-cut/#7c85e2064a6f

[6] http://www.thisismoney.co.uk/news/article-4627306/Inheritance-tax-smashes-5bn-barrier.html and http://www.telegraph.co.uk/news/2016/07/26/new-inheritance-tax-penalises-28000-for-dying-early/

[7] http://www.telegraph.co.uk/news/2017/05/03/labour-hike-inheritance-tax-thousands-families-homes-worth-425000/