Of all British taxes on personal wealth, inheritance tax (IHT) is possibly the most despised. Today, (subject to various exemptions and reliefs), inheritance tax is typically payable on a deceased’s estate over the ‘nil rate band’ threshold currently £325,000 (£650,000 for married couples) at the rate of 40%.
Statistics recently published by HMRC state that £3.4 billion inheritance tax was paid in 2013-14, rising by 8.6% compared to 2012-13.
Property price increases are dragging many middle class working families into this tax bracket. The average price of property in London is now £514,000. That means many single or divorced people who own their house, will owe tax on their estate when they die.
If the threshold had been raised just with inflation since 2009, let alone house price inflation, it would now be at around £370,000 for individuals or £740,000 for couples. Many argue that the threshold should at least rise each year in line with inflation, but the rate has been fixed since 2009.
Earlier this month, there was a great piece of news for pension savers. Chancellor George Osborne abolished the 55 per cent inheritance tax that applied to defined contribution pension pots left by those aged 75 or over, and to pensions in drawdown. Instead of having to pay a punitive 55 per cent tax charge, they will be able to pass on any money left in their pension funds tax free to their loved ones. About 12 million people in the UK have some form of defined contributions pension and about 320,000 retire each year.
Chancellor George Osborne had declared in 2007 plans to raise the inheritance tax threshold to £1m. David Cameron included it in the Tory manifesto before the 2010 election, but the proposals did not make it into the Coalition agreement. The Conservative election manifesto for the next general elections in May 2015, outlines plans to raise the threshold to £1m.
Time will tell if the proposed rise in IHT threshold will happen or not, but in the meantime it is important to organize your financial affairs well in advance. Contact Estate planning specialists at Gladstone Morgan in order to ascertain what, if any, action should be taken in response to the proposed changes.
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