How Inheritance Tax (IHT) is likely to impact more families due to UK economic policy in response to Coronavirus

Posted: 3rd December 2020 Key

The IHT Nil Rate Band – the amount which an individual can leave to their beneficiaries on death without paying the tax – has remained unchanged since 2009 at £325,000. Of course, asset values have not remained static and so more and more estates have become liable to IHT over recent years.

The phasing in of the Residence Nil Rate Band started in 2017 and now sits at an additional £175,000 per person, providing some welcome relief for homeowners wishing to pass their family home on to their direct descendants. Furthermore, when the first of a married couple to pass away leaves their entire estate to their surviving spouse, IHT is not normally payable at the time and the unused Nil Rate Bands can be passed on, effectively doubling the amount which can be passed on following the second death. Where a married couple jointly owns a family home and wants to leave it to their children, for example, the total IHT exemption would be £1m.

Of course, much of this is of little comfort to unmarried couples, those who are single, or those who have no direct descendants. For estates in excess of £2m, the Residence Nil Rate Band also starts to be tapered away and disappears completely for estates above £2.35m.

Following the introduction of the Residence Nil Rate Band in 2017 after almost a decade of the Nil Rate Band having been frozen, we believe it is unlikely that we will see a further rise for perhaps another decade or more. Any opportunity for a UK government to raise additional tax revenue to pay for the economic fallout of the Coronavirus pandemic is likely to be seized upon.

In recent days, The Bank of England has announced a further £150 billion of quantitative easing to try to soften the impact of the new lockdown. This is on top of the £300bn already pledged this year, thereby significantly exceeding the £375bn pumped into the economy between 2009 and 2012, post the Financial Crisis. If we take a lesson from that time, we expect that the money will work its way out into the wider economy and create inflation. This situation, along with record low interest rates, would, all things being equal, mean a boost to the values of investment portfolios, properties and therefore estate values.

If the expected inertia in IHT policy outlined above holds true, the combined effect is that the number of estates being liable for an IHT charge and the average size of that tax bill looks set to rise.

There are of course actions that can be taken to reduce or mitigate entirely the IHT liability on a person’s estate. I have written a further article touching on some of these options: Actions you can take to reduce or mitigate the IHT liability on your estate. As you might expect, the way in which the IHT rules work and interrelate is complex. We would welcome the opportunity to discuss the ways in which we can help you, based on your specific circumstances.

Joseph Cooper FPFS – Chartered Financial Planner

3rd December 2020

The information contained in this article is not a personal recommendation and should not be construed as investment advice. If you are unsure about the suitability of a particular investment you should speak to an authorised financial adviser.

Every effort is taken to ensure the accuracy of the information provided but no warranties or given.

HMRC tax rates and allowances are subject to change and tax treatment may depend on individual circumstances.

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Joseph Cooper