Those people who are being bequeathed some of the biggest estates in the UK are only paying 10% inheritance tax (IHT).
With IHT being ostracised across Britain, a review finds that even though the standard IHT rate is 40%, the rate that is actually paid peaks at 20%, and falling further still for much larger estates at a rate of 10%.
IHT is paid if the estate (which includes the property, money and possessions) value exceeds £325,000. The threshold increases to £475,000 if the estate is given away to children (including adopted, foster or stepchildren) or grandchildren.
The Office of Tax Simplification (OTS) says it is “an almost uniquely unpopular tax”, and that less than 5% of estates must pay IHT.
THE OTS makes recommendations in the review that the government should introduce an easy, modern, digital system for IHT.
With over 3,500 people giving their views on IHT, one of the main worries was that the more affluent dodge paying tax because they are able to pay professional advisers to assist them with putting assets in trusts etc.
A few months ago, the government forecast revealed that a million people over the age of 60 risk their estates entering the IHT liability threshold of £325,000 because of historically rising house prices.
The Office for Budget Responsibility (OBR) forecasts have predicted that this windfall of liable estates is going to increase inheritance tax contributions by over £1 billion in the next five years.
As so many estates are hovering on the edge of the IHT threshold, it is vital that estate owners are offered appropriate guidance that could help to minimise the overall total IHT they are liable to pay.
Looking at the analysis of inheritance tax data for 2015-2016, those concerned that richer people avoid paying tax is justified – as estates with a net value of less than £1 million pay an average of 5 per cent or less in inheritance tax.
In addition, the tax paid then rises and plateaus at 20 per cent for estates worth between £3 million and £7 million before falling to 10 per cent for those with estates valued at £10 million or more.
The OTS writes: “One might expect the average effective tax rate to be closer to the headline rate of 40 per cent for higher value estates, but this is not the case. One of the main reasons is the spouse or civil partners exemption and other reliefs.
“On average more than 70 per cent of the value of an estate worth more than £10 million is covered by reliefs. Lower value estates mostly consist of cash and residential property, which do not commonly attract relief. As estates increase in value, they have proportionately less cash and residential property, and more securities and other assets that commonly attract relief.
“Those that are wealthier do not need to retain all their wealth to fund their lifestyle . . . so are, in principle, able to give away more during their lifetime, reducing the amount of inheritance tax they could pay.”
Those who contributed to the review, led OTS to conclude that “Inheritance tax appears to be the most uniquely unpopular tax.”
Other responses resulting from the review included: “This tax is unforgiving when you are at your most vulnerable and at your lowest”, “I still have nightmares about it”, and “The burden of form-filling is a tax in itself.”
The comprehensive report is the first of two responses to the chancellor’s call for a review of IHT. The review published this week, looks at the administration of the tax, while a second review, to be published in spring 2020, will look at how it is structured.
The first part review suggest that inheritance tax is adding to the distress of people attempting to deal with excess paperwork following the death of loved one. By implementing a simpler, digital inheritance tax and probate system it would cut down on information required from those who are not liable for IHT.
Laura Suter, an analyst at AJ Bell, an investment platform, says: “It is ridiculous that ten times the number of people fill out a form associated with inheritance tax than actually pay it. A simple online system would mean that up to 250,000 people each year could avoid the stressful process and instead find out instantly online whether they need to complete the longer form.”
For the financial year 2018/19, the government received £5.3 billion in inheritance tax contributions. The latest tax receipts show that the taxman is on course to take £5.5 billion in IHT this tax year, with £3.3 billion taken between April and October. By 2021/22, this number will rise to £5.6 billion and the OBR are confident that in 2023/24 the total will exceed £6.3 billion.
