Inheritance Tax should be abolished – but we can help if it isn’t.

Bill Saunders, a certified financial planner at Acumen Financial Planning, discusses why he thinks inheritance tax should be abolished.

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There, I’ve said it. No doubt there will be some people up in arms at the very concept of abolishing a tax which only affects very rich people (except it doesn’t), but please, allow me to explain my rationale.

To start with, Inheritance Tax (IHT) in percentage terms raises a miniscule amount of money for the UK government. According to the Office for Budget Responsibility, it amounts to 0.7% of tax receipts and represents just 0.3% of national income.

Inheritance tax is double taxation

It’s small beer, and it’s wrong on so many levels. My number one objection is that it is effectively double taxation. Assets accumulated over a lifetime have largely come out of taxed income – in other words, the government has already had a significant slice. Then, because you have died, after some allowances, there is another 40% to pay. And it’s not as if it’s an event we have any control over.

Countries around the world have varying attitudes and thresholds for applying Inheritance Tax or its equivalent. In the UK, after the first £325,000, 40% is charged on the balance. In many European countries the threshold is less than that, yet in the US, the official estate and gift exclusion before tax becomes due is $12.92 million in 2023. In New Zealand, Canada, Mexico and Portugal there is no inheritance tax. Australia abolished it in 1979.

Inheritance tax doesn’t affect only the wealthy

It is a myth that IHT only affects wealthy people. By August 2022, the average price of a house in the UK had reached £298,000, meaning that a single Mr or Ms Average living alone in that average priced house would need to have just £27,000 of savings or other assets before the government came looking for their 40%. Yes, there are other exemptions such as the Resident Nil Rate Band which applies if the home is passed onto direct dependants, but my point is that you don’t need to be super rich for your family to be affected by IHT.

In fact, being super rich when thinking about who gets clobbered most by IHT is dead handy. According to the OECD, the richest 0.01% of the world’s population own 50% of the assets squirrelled away in tax-free offshore havens. Also, Mr or Ms Average in the above example may not own agricultural land or a business, for which there are generous tax reliefs from IHT – these cost the government about £600 million every year. As a result, it is estimated that estates worth more than £10 million are often paying an effective rate of IHT of around 10%, which is half the rate of those with assets of £2 to £3 million. There is nothing fair about that.

Strategies to reduce inheritance tax

However, we are where we are and in the current political and economic environment it is almost inevitable that we will be stuck with IHT in the UK for the foreseeable future. The good news is that there are a number established and perfectly legal ways that families of average wealth can drastically reduce the amount of Inheritance Tax their families will need to pay.

Perhaps the number one strategy is to give money away during your lifetime and then make sure you live for 7 years after that, at which time, the gift will be deemed to be outside your estate for IHT purposes. This 7 year “clock” can be accelerated to 2 years if investing in certain assets. You are also able to give money away but still benefit from an “income” from the money you gifted if set up as certain types of trust.

You can also make unlimited gifts out of income which are not subject to a seven or two year clock, if certain conditions are met. In addition, there are potential solutions for the family home, should that be the biggest contributor to IHT exposure.

Of course, giving money away during one’s lifetime is not always an enticing prospect and frankly can be a little scary without being 100% confident that it can be done without affecting one’s own standard of living, now or at any time in the future – this is where lifetime cashflow modelling can come into its own.

Acumen Financial Planning is able to help with all of the above – if you would like an initial discussion, even if it is just to tell us about your own views on whether Inheritance Tax is a good or bad thing, don’t hesitate to get in touch.

The award-winning firm, Acumen Financial Planning has offices in Aberdeen, Edinburgh, Elgin and Glasgow.

Email info@acumenfp.com or check out Acumen Financial Planning’s website.