With the UK Budget now set to take place on October 29, speculation about what Chancellor Phillip Hammond may have up his sleeve is set to intensify, especially as the Government has pledged to spend a whopping extra £20 billion on the NHS in England by 2023. Another area that could be subject to tinkering is the regime around gifting and inheritance tax (IHT). Earlier this year Mr Hammond ordered the Office of Tax Simplification to undertake a comprehensive review of the rules, describing the existing regime as “particularly complex”.
Although most estates are not subject to IHT, increasing numbers of them are falling into the trap as a result of soaring property prices and stock markets in recent years and the fact that the amount of assets that are free from IHT on death has been frozen stubbornly at £325,000 per person for a decade. This has provided a windfall to HM Treasury’s coffers, which last year banked a record £5.2bn of IHT receipts.
IHT is a voluntary tax that no one needs to pay if they plan ahead, but people can drift into it inadvertently. Many people simply don’t like to think about death and so avoid planning for the financial consequences of the inevitable or they find the rules are complicated and confusing but are reluctant to take professional advice. In many cases, the division of assets is parked as a matter to be addressed after death when it could be too late to avoid unnecessary tax.
There are many ways to manage or mitigate a potential IHT liability. These include maximising pensions, which are free from IHT, or shifting investments into Enterprise Investments schemes, portfolios of AIM-listed companies or other unquoted assets that might qualify for business relief once held for two years. It is also possible to set up a trust and gift assets to it. One of the more simple steps that can be taken is to take out a life insurance policy that pays a lump sum to your beneficiaries when you die, which could then be used to settle an IHT bill without the trauma of having to sell family possessions.
Of course the easiest way to reduce the chances of your family having to meet a large tax demand is to give your money away while you are alive. Most people, when they consider it, would surely sooner have their families, loved ones or cherished causes receive as much of their wealth as possible rather than it land with the Treasury to be spent by the government of the day?
Under current rules, there are a variety of allowances for making tax-free gifts. Everyone has an annual gifting allowance of £3,000 per year and people can also make small gifts of up to £250 per person. Regular gifts out of excess income, rather than capital, can also be made providing these won’t affect your normal lifestyle. Such regular gifts could be used to help with education costs or to make regular contributions in to a Junior ISA, Child Trust Fund or a pension for a child or grandchild. But any gift could be potentially exempt from future inheritance tax, providing you survive at least seven years after making it.
As the Chancellor dwells on his Budget plans, above all he should consider his review of the gifting and inheritance regime as a real opportunity to help alleviate the much talked of widening intergenerational wealth divide rather than as a tax raising exercise. For most of modern history, each generation has enjoyed higher living standards and affluence than the one before but stagnant wages, rising house prices and graduate debts, indicate that the current generation of millennials in the their 20s and 30s are on some measures set to be worse off than their parents.
The irony is they are also set to be the beneficiaries of a future inheritance bonanza, with the total value of inheritances set to double over the next two decades. The catch is that this will peak when today’s millennials are in their 60s. Encouraging lifetime gifting has the power to transform the prospect of younger people, while reducing the exposure of older generations to unnecessary tax. That’s a win-win for everyone.
Jason Hollands is managing director of Tilney.
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