What will abolishing Inheritance Tax mean for you?

Emma Gadd, Paralegal, Private Client at Mayo Wynne Baxter, explains.

With the Conservative Party’s recent suggestion of abolishing inheritance tax, some of our clients have joked they’ll just need to make sure they hold out a bit longer before ‘kicking the bucket’, to ensure their estate isn’t hit with a large inheritance tax bill. However, once we’ve delved a little bit deeper into their financial affairs and been able to estimate the value of their estates, we’ve discovered their estates wouldn’t have had to pay it anyway. We’re sure it’s a great relief for them to know they can now ‘pop their clogs’ without time constraints!

Many people are worried by the idea of their estate having to pay inheritance tax, with 31% of those surveyed by YouGov for The Times believing their estate would be liable to pay it. The reality is much more positive for the public’s pocket, with less than 4% of estates paying inheritance tax in 2020 to 2021. So why is there this big gap in the public’s perception of what they will need to pay and the reality? Does this mean the suggestion of abolishing inheritance tax would not affect most of the UK population, or simply affect only the very rich?

Inheritance tax is essentially a tax calculated on the value of someone’s assets when they die. The tax is paid from their estate before the balance is distributed to their beneficiaries, so whilst the beneficiaries will receive a reduced sum due to tax, it is not, as some think, having to come directly from the beneficiaries’ own pockets.

Every individual has a personal allowance called a Nil Rate Band, which is the maximum value of assets they can pass on without incurring any inheritance tax and is so called because any value of estate under this amount is taxed at nil percentage. As of April 2009 this allowance has been £325,000. In simple terms, the value of their estate over this would then be subject to inheritance tax at 40%.

Since October 2007 it has also been possible to transfer any unused Nil Rate Band from your late spouse/civil partner. For example, if on the death of your spouse/civil partner their estate passed tax free to you, then on your death your estate would benefit from your late spouse’s/civil partner’s Nil Rate Band, giving your estate a total of £650,000 worth of assets which would pass inheritance tax free.

In April 2017 an additional benefit was introduced called the Residence Nil Rate Band. This gave individuals a further allowance of £175,000 to offset against the value of their main residence. The property had to be left to their direct descendants to qualify for this, either specifically given in their Will or left as part of the ‘rest of’ their estate. Again, it became possible to transfer your late spouse’s/civil partner’s own Residence Nil Rate Band too.

Taking this all into account, it is possible for a couple who have children/grandchildren to leave an estate worth up to £1 million without incurring inheritance tax, should they satisfy all the requirements, which most people still do. It starts to build a picture of why such a low percentage of estates currently incur inheritance tax.

So, if not that many estates are affected by inheritance tax, why are the Conservative Party so keen to “abolish” it? Public perception has a significant impact, with many calling it the ‘most hated tax’. Additionally, it often affects those in the middle wealth category the most. Those without significant assets are easily within the tax free allowances, and those with significant wealth take legal and financial advice to help to limit their liability. Those who are often caught out are the middle earners wanting to pass on assets such as their family home and the idea of being able to do this “tax free” is a very emotive one.

With the Nil Rate Band confirmed as frozen at £325,000 until at least April 2028, more people are likely to be pulled into this middle earner category. As inflation takes effect and house prices continue to increase overall, the true value of the Nil Rate Band is diminishing. Had the Nil Rate Band increased since 2009 in line with the Consumer Price Index, it should have reached around £465,000 in April 2023.

We can only guess at what alternative tax provisions may be introduced should the Conservative Party abolish inheritance tax, however, in the meantime, we can provide peace of mind to those who are unsure as to what their estate may need to pay, if any. There are a variety of different options available to you during your lifetime to lessen your inheritance tax bill if necessary, or it may be that we can simply allow you to rest easy knowing that this part of the Conservative Party’s plans won’t affect you when you finally depart for those ‘pearly gates’.

www.mayowynnebaxter.co.uk