Rising IHT threshold – will it help or hinder?

The Government’s plans to increase the threshold for the value of estates eligible for Inheritance Tax (IHT) in the Summer Budget may not reduce the level of IHT people pay as much as anticipated.

Recent years have shown an exponential increase in the levels of IHT receipts accepted. Government figures confirm that between the years 2012 and 2013, there was a near 12% increase – surpassing the previous year’s 8.6% growth.

The Government have stated the Summer Budget will introduce plans to raise the IHT threshold. However, Jonathan Gain, Chief Executive at Stellar Asset Management, has warned that the numbers of those estates resulting in IHT payments may not be reduced as much as hoped.

The large amounts received in IHT have garnered criticism from many, particularly those whose estates only just fall within the threshold. The current threshold is set to be increased to £1 million over the next five years. However, some, such as Belinda Watson of Wilsons law firm, view the changes as adding ‘unnecessary complexity to the system’.

The hope was that this would decrease the amount of people falling within the bracket of eligibility. However, this theory has been debunked by Gain, who argues that alternatively, it may cause people instead to become complacent about IHT, believing that they are safely outside of the threshold. Without the correct financial advice, many may unknowingly still come under the IHT umbrella.

Indeed, the Government are predicting that almost double the amount of estates will qualify for IHT by 2020/2021.

So what are the best ways to avoid the risk of a large IHT receipt?

There are several ways in which careful financial planning can lessen the effects of IHT for those concerned. The tax charges placed on pension assets have been reduced from 55% to 45% and are set to decrease further in the following years, linking to the beneficiaries’ income. Trusts are another option allowing assets to pass outside of an estate for the purposes of IHT after seven years.

Business relief is a popular way of effectively managing IHT. Its attractiveness stems from the ability to reserve possession of assets, differing from trusts. An additional factor is that IHT exemption is granted after only two years.

Further options include Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS) which also offer exemption after two years, but as they are designed as compensatory features due to the risk small business owners take, this option will not appeal to all. There is also the option of Alternative Investment Market (AIM) shares, which attract no income or capital gains tax as they can be held in Individual Savings Accounts (ISAs).

There are further options available those wishing to narrow their risk of IHT, but of course the most important advice is to seek professional financial advice. This could see a spike in the number of law firms seeing clients seeking financial advice regarding IHT.

What are your views on the proposed changes to the IHT threshold? Let us know your thoughts in the comment section below.