New research has revealed that inheritance tax (IHT) rates in the UK are more than double the EU average.
Advisors have labelled IHT rates as a “contentious subject” and a reoccurring “hot potato”, as on average individuals in the UK pay 23.9% (£564,523) in inheritance tax when passing on an estate worth £2.4m to their beneficiary.
In comparison, individuals in the EU pay an average of 10.3% (£243,297) on an estate of the same size, as revealed by research conducted by the accountancy network UHY International.
Compared to its European counterparts, the UK has the highest IHT rate followed by Belgium with 27.08% and France with 25.3%
It’s not only the IHT rates that have had experts arguing. Some experts have claimed that the UK’s IHT regime is too complex, as a number of different allowances must be taken into account when calculating what is owed in IHT.
The Office for Tax Simplification has proposed reducing the number of free gift allowances to just one simpler allowance as a result.
Thameside Financial Planning Director Tom Kean said:
“IHT has long been a contentious subject in the UK and quite predictably divides people, especially in a political sense. The recent election has witnessed a collective sigh of relief from many quarters, but it’s a tax that most people resent as it is at such an emotional time for those affected.
“That said, such taxes bring out the best in financial planners, and we relish the opportunity to show our clients the many ways to plan accordingly. We always begin by creating a cash flow model, as the burden is often many years away and therefore sometimes opaque to the people affected.
“From this model, we then make sure the client has enough confidence to manoeuvre their assets in the best way. My personal favourite is regular gifts out of income. Cash flow modelling as made for this sort of planning and with a bit of practice it’s an easy process to go through and very compelling.”
Freezing the IHT threshold at £325,000 for over a decade, has resulted in more families being caught out by the tax. This has led to the Treasury facing growing criticism.
IHT doesn’t just affect the property market and the wills and probate sector. It has been accused of discouraging entrepreneurs from growing their businesses and as a result building their wealth.
UHY International’s research touched on this point. It revealed that the average IHT paid in the UK is 26 times the emerging market average, which stands at 0.9%. Governments in many of the emerging economies across the globe set low IHT rates to encourage wealth creation by entrepreneurs, stimulate economic growth and create employment.
Ian Lowes, Managing Director at Lowes Financial Management, said:
“While I accept that income tax and capital gains tax rates could play a part in wealthy individuals deciding to emigrate, I don’t believe that Inheritance tax plays as much of a role in such decisions, not least because simply emigrating isn’t enough to escape IHT and there is a lot of evidence to suggest that those that do go and live abroad often return in their later years, and of course that’s inevitably, shortly before the IHT reckoning day comes.
“IHT is a re-occurring political ‘hot potato’ and when it becomes such, successive governments have taken steps to take it out of the headlines. Ten years or so ago this was achieved very well through the introduction of the transferable nil rate band, which automatically did for people what they previously could have done for themselves but many didn’t and five years ago through the introduction of the Residence Nil Rate Band. While the latter wasn’t as beneficial as many were led to believe, it served what a cynic like me might consider to be the intended result of taking IHT off the public agenda.”
Mark Giddens, UHY Hacker Young partner said:
“Wealthy individuals in the UK pay some of the biggest sums across the EU when passing on their wealth – no wonder it has been labelled as Britain’s ‘most hated tax’.
“There will always be debate about the rights and wrongs of taxing inherited wealth, but the high rate of IHT in the UK is undoubtedly a factor for those deciding whether to invest or settle here.
“IHT in the UK can be very complicated, and anyone with a sizeable estate will need professional guidance to navigate it. Simplifying it would be a very popular move for the government to make.”
