27 September 2019

As the old adage goes, there are few things in life one can be sure of other than death and taxes. Whilst one might rightly criticise this phrase for failing to recognise the other inescapable certainties we all must face, it is nonetheless effective at highlighting two facts of life which everyone should at least give some consideration.

How concerned should you then be by the combination of both death and taxes in the form of Inheritance Tax (IHT)? Despite what I have just said, IHT has long been considered an issue reserved for high-net-worth individuals and not something that the ‘standard’ UK resident need lose sleep over. However, a recent publication by the Institute for Public Policy Research (IPPR) Scotland has proposed changes to local taxation which could make an IHT liability a reality for more Scots than ever before.

Along with a number of other proposals which include a local carbon tax and a fair work supplement on business rates, the IPPR has identified a local IHT as a potential reform which would provide additional revenues to improve local government funding.

The IPPR noted that the average value of an ordinary estate in Scotland in 2016/17 was circa £250,000 which is significantly below the current IHT threshold of £325,000. With only 2.2% of Scottish deaths being liable for any IHT in 2015/2016, the IPPR suggests that a more progressive local IHT would better address the current wealth distribution in Scotland.

So, what would this local IHT look like and how would it interact with the current UK-wide IHT? The IPPR suggests that the local tax could be applied in one of two ways.

Firstly, the local tax could operate as flat tax paid in addition to the current IHT regime. At present, IHT is charged at a marginal rate of 40% on the value of a deceased person’s estate that exceeds the tax-free threshold of £325,000. The IPPR suggests that a local tax of 10% could come into effect at a lower threshold, say £36,000, meaning that estates would be taxed at 10% between £36,000 and £325,000 and at 50% from £325,000 onwards.

Alternatively, the local tax could sit under the existing threshold and apply a marginal rate to estates which would otherwise not have been caught under the current regime. In that instance, the IPPR suggests that estates could at taxed at 20% between £36,000 and £325,000 and then only subject to the existing 40% rate thereafter.

For now, we must wait and see whether there is a sufficient political or social support to drive local IHT onto the legislative agenda. At present, the UK-wide IHT regime remains unchanged. There are a variety of exemptions and reliefs that you can utilise to reduce the value of an estate for IHT purposes.

Some simple lifetime tax mitigation measures that you can take are:

• Use up all of your annual exemption – each person has an annual IHT allowance of £3,000 which could be used. Any unused annual exemption can also be carried forward into the following tax year allowing for a maximum annual exemption of £6,000.
• Regular gifts out of surplus income – if it can be shown that a gift formed part of an individual’s normal expenditure, was made out of income and left them with enough income to maintain their normal standard of living, the gift can be exempt from IHT.
• Gifting to charities – making a gift to a charity is not only exempt for IHT purposes but if you leave more than 10% of your net estate to charity then your estate will be subject to a reduced IHT rate of 36%.
• Writing life policies in trust – in broad terms, policies which are set up to distribute funds on death should be written in trust. On death, the proceeds will not be treated as part of the deceased’s estate and as such should not generate an IHT liability.

Although changes may be on the way, it is safe to assume that IHT will continue to form part of the UK tax system for the foreseeable future. If you are concerned about a potential IHT liability, it is important that you seek advice from a legal or financial professional who can advise you on your options. At BTO, we have a skilful team who are experienced in drafting tax-efficient wills to help future proof your wishes. Our team takes the time to understand your circumstances so that we can offer a personalised service tailored to your individual needs.

To discuss this and all of your Will, succession and IHT planning issues, please contact a member of our Wills, Estates & Succession Planning team.