Arguments For And Against Iht

Chris Black, a Divisional Director at Brewin Dolphin in Newcastle, reflects on the contentious issue of inhertance tax and examines possible ways to limit your exposure.

IHT is a contentious issue in the UK and around the world. People tend to be either strongly for it or vehemently opposed. That means any tinkering with the system will anger at least one of these two groups.

Those in favour of taxing the deceased say it’s a good way to spread wealth, taking it from rich estates and re-distributing via government spending. As a tax on capital, not income, it doesn’t exert pressure on hard-working families like income tax does, for example.

The anti-IHT camp argues it’s a levy on money that has already been taxed; why should people have to pay again? Parents, they say, should be free to pass on assets to their children without the government helping itself to a slice.

“The arguments for and against IHT depend on a few variables, like where you stand politically and where you think government revenues should come from,” explains Chris Black, a chartered financial planner at Brewin Dolphin in Newcastle.

Chris points out that, though IHT raises a comparatively small amount of tax in the UK, the money would still have to be collected from somewhere after a ban. Would a £5bn increase in income tax be preferable?

So rather than banning inheritance tax, successive UK governments have tinkered around the edges to make it fairer and clearer. But subtle changes have in some cases muddied the water and complex planning measures are needed to minimise the impact on people’s estates.

Most allowances and reliefs have been static since the early 1980s including the £3,000 annual exemption for gifts as well as a £5,000 relief on gifts in consideration of a marriage or – more recently – a civil partnership.

The nil-rate band climbed in successive years until it hit £325,000 in 2009 and has been frozen ever since. But the introduction of an exemption on family homes has counteracted this fiscal tightening. Married homeowners may be able to pass on £1 million-worth of cash and assets to children, compared with £650,000 just a few years ago. A seven-year tapering of tax liabilities on gifts, which reduces tax owed to zero at the end of the term, complicates matters further and makes foresight and preparation all the more important.

But aside from these changes, there are a few areas people should examine if they want to limit their exposure to IHT. One is gifting, which is tax-free between spouses and civil partners. You can also give any amount of money or property to an heir without paying tax, providing you live for seven years after the transaction is made.

You can put cash and assets into a trust which can become after 7 years, tax-exempt but from which you and your heirs can benefit, and leaving 10% of your estate to charity will reduce your IHT bill from 40% to 36%. Taking out a valuable life insurance policy could help surviving relatives pay costs after your death. Again, this could be paid into a trust.

Inheritance tax will never be universally popular, particularly not among those faced with the prospect of paying it. But with a little preparation you can ensure that the taxman doesn’t become your ‘favourite child’ and that the great majority of what you earn throughout life is passed on to your intended beneficiaries in death.