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What Next For UK Inheritance Tax?

What Next For UK Inheritance Tax?  The UK imposes one of the highest inheritance tax burdens in the world, and this is a tax that continues to impact UK nationals even if they have been living abroad for a while. Prime Minister David Cameron has suggested he would like to raise the threshold – what are the chances this will happen?

If you are a UK domicile, inheritance tax is charged at a rate of 40% on the value of your worldwide estate above a threshold or allowance of £325,000. Domicile is a much more permanent concept than residence, so most British expatriates remain liable for this tax.

According to the accountancy network UHY, the UK and Ireland levy the highest rates of inheritance tax in the world. Based on an estate worth £1.8 million, the UK would take 25.8% from the estate in inheritance tax – significantly more than the global average of 7.67%. Ireland’s take is slightly higher at 26%.

It is worse for people who have never married. Their estates lose 32.9% to the UK taxman.

UHY explains that governments in established European economies are increasingly reliant on the substantial income streams produced by death taxes. It is also a way of generating tax revenue from ageing populations, since retirees have lower levels of taxable income but substantial assets like mortgage free homes.

In the UK inheritance tax has long been an unpopular tax, increasingly so as more families are caught in its tax net. Promising to abolish or alleviate it is one way to woo voters.

Prime Minister John Major proposed abolishing inheritance tax completely at the 1991 Conservative Party conference, though no action was taken. In 1996 Chancellor Kenneth Clarke said that “this government is committed to reducing and the abolishing capital gains tax and inheritance tax”. This clearly has not happened, though he did at least raise the threshold.

In 2007 George Osborne, then the shadow Chancellor, pledged to raise the threshold to £1 million if the Conservatives won the next election. It remains £325,000.

Now Mr Cameron has said he still hopes to lift more people out of the inheritance tax net.

He was speaking at a Saga question and answer session when he was asked if the 2007 pledge still stood. He explained they had not been able to fulfil that promise because of opposition from their coalition partners.

"Would I like to go further in future - yes I would”, he said. “I believe in people being able to pass money down through the generations and pass things onto their children. You build a stronger society like that.

He did say that there was always a necessity for caps and limits, but that “inheritance tax should only really be paid by the rich”.

Inheritance tax has improved a little since 2007, when the Labour government responded to the Conservatives pledge by allowing the allowance to be transferred to a spouse. This creates a potential total threshold of £650,000.

However, the individual threshold has been frozen at £325,000 since 2009, which means British families pay more inheritance tax.

In December the Office for Budget Responsibility calculated that Treasury earnings from inheritance tax would increase considerably, from £3.1 billion in 2012-13 to £5.6 billion in 2018/19. Just three months later it has already revised the estimate up by £800 million.

Any government would therefore need to carefully consider the impact of raising the threshold. Increasing it to £1 million would benefit many families, but would come at a considerable cost to the Treasury.

The Institute for Fiscal Studies worked out that if the government had raised the threshold to £1 million in 2010, the Exchequer would have lost £1.8 billion. It would have earned £0.8 billion from this tax over the 2010/11 tax year, compared to the £2.6 billion it actually did.

Since inheritance tax receipts are projected to increase sharply, if the threshold were to change to £1 million now, it would cost the government considerably more.

The Institute calculates that if inheritance tax remains unchanged, receipts from the tax will reach a 45 high in 2018. The number of people paying this tax will have increased fourfold between 2009/10 and 2018/19.

Inheritance is often considered a voluntary tax since here are steps you can usually take to reduce or avoid this tax for your family and heirs. However, this is a complicated tax, especially when involving more than one country. Seek expert advice for the best solution for your family.

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.

Blevins FranksW : www.blevinsfranks.com
E: algarve@blevinsfranks.com
T: 289 350 150 

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