Published: 15 June 2018
When the Chancellor triggered a review into the Inheritance Tax (IHT) system in January he was likely confident that it would be a popular move.
In his letter to the Office of Tax Simplification (OTS), Philip Hammond called for a review of the “particularly complex” IHT system, in search of proposals that would ensure it is “fit for purpose”1. The OTS - which acts as an independent adviser to the Treasury - said it would look at the “user experience” relating to IHT issues as well as the complexity of the rules2.
Currently, IHT is only paid after around one in every 20 deaths3 , but the government collected a record £4.9 billion in the 2016-17 tax year4, with a sharp recovery since the financial crisis reflecting a surge in the value of property and other assets.
Many of the baby boomer generation, retiring now, will have substantial property, pension and investments assets to pass on when they die, and their families may find the nil rate IHT band isn’t as generous as it once seemed.
As it stands, the nil rate band - above which IHT of 40% is charged on an estate - is £325,000. Where a family home is involved, a new (additional) nil rate band took effect last year. It's £125,000 for the 2018/19 tax year, and will increase the amount that can potentially be passed on free of IHT over the coming years. If you are married or in a civil partnership, any nil rate band that isn’t used by your estate can be added to your partner’s nil rate band when they die.
If you are concerned that IHT may be an issue for your estate, there are several ways of covering the IHT bill that your beneficiaries might face. There are also a number of options when it comes to mitigating potential IHT liabilities in advance, whether assets are being passed on to children, grandchildren or others.
This is provided for general information only and takes no account of personal circumstances. It is not a recommendation to buy or sell. It is provided solely to support you in making your own investment decisions. If you have any doubts as to their suitability you should seek expert advice. Alliance Trust Savings does not give financial or investment advice.
Laws and tax rules may change in the future without notice.
Please be aware that the value of investments can fall as well as rise so you could get back less than you invest.
gov.uk, Chancellor requests OTS review of Inheritance tax, 29 January 2018
2 Financial Times, Hammond calls for simpler inheritance tax, 2 February 2018
3 As above
4 CityAM, Inheritance tax reaches another record as £4.9bn receipts more than double in less than 20 years, 28 July 2017
Beneficiaries don’t usually pay inheritance tax on money from a pension pot because payment is usually discretionary. The pension provider chooses whether to pay it to them based on what you told them in your Expression of Wish form, making it vital to keep this up-to-date for all pensions you have.
Alliance Trust Savings Limited is a subsidiary of Alliance Trust PLC and is registered in Scotland No. SC 98767, registered office, PO Box 164, 8 West Marketgait, Dundee DD1 9YP; is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, firm reference number 116115. Alliance Trust Savings gives no financial or investment advice.