Inheritance Tax: Combatting the relentless rise of tax bills15 Jul 2019
The UK’s widespread obsession with home ownership means there is a significant number of property wealth accounts for estates in the region.
The flipside to this longing for a place to call home means in the likes of London and the South East, rising property prices have pushed many into a tax bracket once reserved for the most wealthy.
In the current tax year, HMRC has already banked £4.5bn from inheritance tax and the annual total is expected to trump last year’s final figure of £5.2bn - a record receipt.
Fortunately, there are a number of measures you can take to minimise inheritance tax. Most require forward planning and could have unforeseen ramifications. Therefore, you should always seek advice from an accountant before proceeding with any of the strategies outlined below.
That’s where our tax experts come in - our team have a wealth of experience when it comes to optimising an individual’s or business’ tax position, including getting your tax affairs in order ahead of selling your business.
Furthermore, if you are thinking of selling up, our MBA-qualified business consultant is on hand to provide an accurate business valuation and ensure you don’t sell yourself short.
Get in touch with us about inheritance tax and we would be happy to discuss a bespoke strategy for you.
Know which plans represent value
Most life assurance policies are set up with a fixed term and will only pay out if the holder dies during that time. However, a whole-of-life policy guarantees a payout regardless of when the holder dies, assuming contributions have been maintained.
These policies can be written into trust, meaning they will fall outside of your estate when you die, will not count towards inheritance tax and instead pass straight to your family. This provides a cash lump sum with which to pay any tax or mortgage debts that are due.
There are two types of whole-of-life policies – reviewable or guaranteed. More often than not, guaranteed is a more sensible option.
Reviewable policies are cheaper, but premiums can become unaffordable or payouts can be slashed after around 10 years as the cost to the insurer increases.
Part of the premiums is kept to one side to offer a smaller payout if the policyholder wants to give up the plan, but this can also be eaten into as the insurer tries to limit its costs and keep premiums low.
In years gone by, many whole-of-life plans were sold with an investment element, or with premiums that increased over time. If the investment performance is poor, these can become unaffordable.
The value of having peace of mind
Guaranteed policies are more expensive but their premiums will not increase. Furthermore, premiums are cheaper for younger people.
For example, cover of £100,000 for a healthy non-smoker over their lifetime would cost £39.07 per month, for someone paying from the age of 18.
This goes up to £45.96 for those starting at 25, £70.22 at the age of 40, and £105.53 at 50.
Inheritance tax is charged at a rate of 40% on estates over £325,000. If you are passing your main residence on to direct descendants you can benefit from the family home allowance, giving you an added £125,000 protection.
This allowance, introduced in 2017, increases by £25,000 each tax year until it hits £175,000 in 2020, allowing spouses and civil partners to double up and pass on £1m tax-free.
Even when tax is not due, families inheriting homes with mortgages attached still faced the same problems, as lenders will typically seek to recover debts from the estate after the borrower has died.
The culprit for this scenario - the rise of inherited mortgage debt as a result of growth in equity release.
Traditionally, people spend all their lives paying off debt with the aim of having lower expenditure in retirement.
However, as the property increases in value and as money remains cheap, the realisation that there is a significant sum tied up in property has likely led to a rise in equity being released via debt against the property, or a reluctance to pay off mortgages in such a rush,.
Always think ahead
A simple insurance policy could save families from these common traps.
For example, if one sibling wants to carry on living in the family home and another doesn’t, a lump sum of similar value to the property can be paid out to the other.
Ultimately, life assurance should be seen in the same way as building up any type of asset to gift to children or grandchildren that can be passed on without incurring tax.
In an age of instant gratification and greater access money, there is less appetite to invest in life insurance policies.
Many younger clients will prefer to invest any spare cash into an investment portfolio as they see this as something they can benefit from in their lifetime, but they don’t think about what happens after they have gone.
Unfortunately life insurance is less glamorous than buying shares, despite its obvious benefits.
It’s vital to reiterate that before undertaking any of the above strategies you are advised to speak with your accountant and get their professional guidance.