Inheritance Tax: How to navigate ‘the most hated tax’

There is currently a lot of speculation as to whether Rishi Sunak is going to shake up Inheritance Tax (IHT). There are suggestions that he may reduce the 40% levy and in doing so, pave the way for scrapping the tax altogether. But why?

In his book ‘Follow the money: How Much Does Britain Cost?’, Director of the IFS, Paul Johnson explains: “Bringing in less than £7 billion a year, [IHT] would seem barely to warrant a mention*. But it is a tax which attracts a disproportionate amount of both attention and opprobrium.”

He goes on to point out that: ”…. across the Western world, there are few taxes as unpopular as inheritance tax. Sweden and Norway, often considered beacons of social democracy and equality, have abolished their inheritance taxes entirely. Meanwhile, estate taxation in the United States has produced the rallying cry ‘no taxation without respiration’.”

But until the day comes when the UK follows in the footsteps of our Swedish and Norwegian neighbours (if indeed we ever do), here’s what you can do to stay ahead of the curve.

Most importantly you need to have a Will

The first place to start is a Will. No matter your marital status, age or financial situation, having a Will is absolutely essential. It is quick and easy to sort – it is really a bit of a no brainer. It will undoubtedly prove to be your most valuable asset and is your most powerful tool when it comes to IHT.

No one likes to think about death. But actually, thinking about death can be a very healthy pursuit, particularly where our finances are concerned. It’s not so much thinking about ourselves, and what lies in the great beyond. It’s about what happens to those we leave behind. Did we do right by them? Have we sufficiently protected them from what might be coming their way?

Questions like this can come looming into focus when you reach a certain point in life. It might be an accident or diagnosis, or the death of a close relative or loved one. Or it might be because of the tax man. If you’re reading this and you’re single with no dependents, you probably think ‘so what?’ And you would be right. When you’re gone and there is no one to pick up the pieces, it really doesn’t matter does it? But what if you die, and because you didn’t plan properly, you have loved ones who end up with a massive tax bill. That would matter wouldn’t it?

What are the thresholds?

Currently, the tax kicks in when you have assets worth more than £325,000. For a married couple or those in a civil partnership, this doubles (but not for those who are simply co-habiting, no matter how long it has been) and there can also be £175,000 added if you have children.

Over and above this total amount, whatever it might be in your case, you will – or at least your loved ones will – pay 40%. Giving money to a charity, placing assets into a Trust and using a deed of variation can all be useful things to include in your Will to be carried out on your death.

How much money do you really need?

But even if you don’t have a Will, there are lots of things you can do that can help with IHT. Giving regular gifts to the people who matter most to you will go a long way to help you manage your exposure to IHT, as can taking out Life Insurance. If your assets are all tied up in the home you live in, you could consider equity release.

Indeed, you could follow the recommendations Bill Perkins makes in his Wall Street Journal Bestseller, ‘Die with Zero: Getting all you can from your money and your life’ where he suggests things like giving your children their inheritance when they need it most (usually in their 30s not their 60s when you are gone) and that you don’t need as much money in retirement as you think, so get a good financial plan together (we couldn’t agree more) and be realistic about how much you can really afford to spend now. It may be more than you think, so get spending….or stop working! If you would like to discuss IHT or a putting together a financial plan to establish how much money you’ll need to live the life you want, please do get in touch.

*IHT currently brings less than £7 billion into the government’s coffers. This pales into insignificance when compared to the likes of Capital Gains Tax (£16 billion), Council Tax (£42 billion) and the behemoth that is Income Tax (£248 billion). Source: ‘Follow the money: How Much Does Britain Cost?’, by Paul Johnson