HMRC recorded £5.4 billion in inheritance tax collected in the 2018-2019 tax year. This is a £200 million rise on the previous year.
Canada Life have predicted that figure to rocket to £10 billion by 2030.
This is due to a few things, firstly because house prices particularly in the South East continue to rise, which means many estates are falling foul to inheritance tax despite having very little liquid assets.
The other is the post war baby boom. The boom started in 1947, which means the first baby boomers are currently 72 years old. It is estimated that currently 1-in-6 over 60 year olds own more than one home. Much of the nation’s wealth resides in the hands of the baby boomers.
Currently the average life expectancy in the UK is 80.96 years old.
So what should people be doing to ensure that they are not paying too much inheritance tax?
The first thing is to have a valid Will in place. Without a Will, you die intestate. This means that your estate is distributed according to predefined rules depending on who survives you. If you die and leave a spouse and children then your estate is distributed as follows:
- First £250,000 and chattels go to your spouse;
- Half of the remainder goes to your spouse; and
- The remainder is split in equal shares to your children.
Depending on your estate size the final amount may be partially taxable at 40%.
Everyone has a Nil Rate Band allowance of £325,000 and a Residential Nil Rate Band allowance, should they meet the set criteria, of £150,000. However, you can pass the unused portions of these bands to your spouse, meaning they would have £950,000 band allowances before paying tax and if they survive until April 6th 2020 then they would have £1million band allowance.
Another tool that this generation could use is gifting. You can give away assets, as long as you no longer benefit from those assets, they are potentially exempt transfers. This means that should you survive 7 years from the date of the gift then they are exempt from tax.
You could gift to your spouse on first death and then gift away to children prior to second death to attempt to reduce the tax on your children.
You could seek financial advice and look at investments that qualify for business relief. Although these do not reduce your estate size, they do after two years of ownership become liable to 0% tax.
If you have life insurance then you could write that in trust. Therefore the amount is outside of your estate for tax purposes.
Inheritance tax needs to be paid within 6 months of the date of death. Administration of an estate can be a mine field and the Office of Tax Simplification have said that Inheritance Tax forms need to be reformed to make it easier for executors and administrators.