The meek shall inherit the earth, according to the Bible. In the case of the UK tax authority, the meek Chancellor levies 40% inheritance tax on estates. If you have two or more heirs, it could mean that George Osborne’s office takes the largest share of your estate unless you plan carefully.
The situation is getting worse, with Mr Osborne’s measures expected to drag tens of thousands more British families into the inheritance tax net over the next five years.
Inheritance tax is charged at 40%, over a tax free allowance – the “threshold” or “nil rate band” - of £325,000.
British expatriates do not escape this tax nearly as easily as they do most other UK taxes. It will affect you and your heirs if ...
• You remain a UK domicile (as many British expatriates do)
• You own property or other assets in the UK
• You or your spouse may return to the UK one day.
It is charged on your worldwide assets (unless you are non-UK domiciled on death, in which case it only applies to UK assets).
The threshold has been frozen at £325,000 since 2009, and is scheduled to remain unchanged until April 2018. Around 176,000 estates are expected to be affected.
The freeze is having the desired effect – for the government, that is, with HM Treasury earning more revenue. On the other hand families are losing out on more of their inheritance.
If the threshold had risen with inflation each year, as was the case prior to 2009, it would be £372,000 today. The result is that families are paying an extra £18,800 in tax.
The threshold would rise to £415,000 by 2018 if inflation linked. With it being frozen, estates caught in the tax net will pay an extra £36,000 in tax in 2018.
Think what your children or grandchildren could do with this money. Take professional advice and plan to protect your family from this tax.
The Treasury is expected to earn around £3.3 billion this tax year from inheritance tax - 14% more than last year, and the third annual increase in a row.
With the threshold failing to keep pace with rising house prices, the Treasury is getting an extra windfall. The average house price increased by 5.8% in the year to October 2013 (according to the Nationwide House Price Index). Savills real estate agency expects them to increase 25% by 2018.
Accountancy firm Grant Thornton calculates that the number of estates falling into the inheritance tax trap could double within four years as a result. 42,000 estates will pay tax in 2016/17, compared to 21,000 in 2012/13.
This is much more than the previous peak of 34,000 estates in 2006/07.
The Treasury defends the freeze, saying that less than 4% of estates pay the tax, and that the freeze will help to fund social care.
However, many will agree with Matthew Sinclair’s, chief executive of the Taxpayer’s Alliance, sentiments:
“Inheritance is a deeply unfair double tax that punishes families simply for having the misfortune of losing a loved one. Not only has Osborne failed to increase the threshold as he promised he would, but he also appears all too willing to drag more people into paying death duties. Rising house prices are compounding the damage done by the chancellor’s broken promises. It’s time he axed this tax altogether.”
In October 2007, when Mr Osborne was still the shadow chancellor, he said a Conservative Government would increase the threshold to £1 million to “take the family home out of inheritance tax”.
Understandably this proved a popular proposal. In response the Labour government allowed the £325,000 allowance to be transferred between spouses, potentially increasing the nil rate band to £650,000 for married couples and civil partners.
This £650,000 is still far off £1 million. For many people, the family home still falls into the inheritance net, including overseas properties.
Inheritance tax should normally be paid within six months of death, with interest being charged after that. Your executors may need to borrow capital to pay the bill if probate does not come through on time or there are insufficient liquid assets.
There are various ways to mitigate inheritance tax for your family and heirs, and save them the headache of having to sort it out.
This is a complex area, more so for expatriates, and can be a legislative minefield. Specialist, detailed advice is essential.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
To keep in touch with the latest developments in the offshore world, check out the latest news on our website www.blevinsfranks.com
Written by Gavin Scott, Senior Partner, Blevins Franks