INHERITANCE TAX
Ken Jones FCA CTA
Tax Partner
BURGESS HODGSON
Burgess Hodgson has again been short listed
for the Accountancy Age awards national Medium
Firm of the Year, having been a finalist in 2007.
Benjamin Franklin (1706-1790)
Who’s this? – and what was his famous saying?
Key Principles of IHT Planning
• Understand the tax
"In this world nothing can be said to be
certain, except death and taxes.”
• Draw up a Personal Balance Sheet
• Plan early
• Take professional advice
Are things very different 250 years later?
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How much does IHT raise?
Out of total taxes of £516 billion in
2007/08 how much did IHT raise?
How much does IHT raise?
Answer is £3.9 billion (E), others are:
A - £100.4 billion – National Insurance
A - £100.4 billion
B - £46.7 billion – Corporation Tax
B - £46.7 billion
C - £14.1 billion – Stamp Duty
C - £14.1 billion
D - £5.3 billion – Capital Gains Tax
D - £5.3 billion
Income Tax is “top tax” at £151.8 billion.
E - £3.9 billion
Source: (Treasury Budget 2009 Supplementary Information)
How much does IHT raise?
Very little compared with total taxes (£ billions):
2007/08 (actual) - £3.9 out of £516
2008/09 (estimate) - £2.9 out of £505
2009/10 (projection) - £2.3 out of £465
2010/11 (projection) - £1.9 out of £493
2012/12 (projection) - £1.9 out of £537
Why are IHT receipts falling?
• Total tax receipts are dropping due to the
recession (but predicted to start rising again in
2010/11 …)
• Fall in house prices has huge impact on IHT
receipts, which are predicted to halve (2007/08
£3.9b to 2010/11 £1.9b)
• Costs to Government of administration /
collection are high compared with yield
from other taxes)
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What is the purpose of the Tax?
“We on the Government side believe that, if there is no
limit on the ability of the wealthy minority to pass on
the fruits of their labour to their children, we introduce
into the class structure of this country a degree of
rigidity, indeed, immobility, which is deeply damaging
to both its economic efficiency and its social unity.
There is overwhelming agreement on this point in the
country”
(Chancellor Denis Healey on the introduction of Capital
Transfer Tax, the forerunner of IHT, in 1975 – opposing the
debate was the leader of the Conservative Opposition, Mrs
Thatcher!). The top rate of CTT was 75%.
Tax Rates
• Assets up to £325,000 – no tax
• Excess over £325,000 – tax at 40%. No
other lower / marginal rates
• Couples / civil partnerships can share
their thresholds by transfer of the unused
part on death, so total exemption is
£650,000 for 2009/10
In Short:
• The Government’s main source of IHT is
on the value of peoples houses at the time of
their death – tax take has increased as
house prices have risen in recent years but
now falling dramatically
• It is a politically motivated tax which
changes in focus depending upon the colour
of the Government in power
Tax Rates
• Limits set to rise to £350,000 per
person (£700,000 per couple) from 6
April 2010
• Conservative party proposes to raise
threshold to £1 million
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£1 million or £2 million?
• Conservative policy is £1 million per person,
i.e. £2 million per couple
• Hugely politically significant – takes vast
majority of people out of IHT net
• If Conservatives are elected, when can this
be implemented?
IHT 1997 v IHT 2009
• Inheritance Tax (IHT) Threshold
(sometimes called the nil rate band) when
Labour came to power in 1997 - £200,000
• IHT Threshold now - £325,000
• An increase of 62.5%
• Political decision – IHT brings in very little
tax anyway
The effect of House Price Rises
Summary
• House prices have increased by 174%
in the Outer South East region from the
first quarter of 1997 to the third quarter
of 2009 (Source: Nationwide House Price Index)
• IHT is a significant problem for many living
in the South East, and especially in or
around London. Less so in the North where
house prices are lower.
• A house worth £200,000 in 1997 would
be worth £549,000 today – the IHT
threshold has only risen to £325,000
• The proposed Conservative increase in
threshold to £2 million per couple would
eliminate the problem for the vast majority of
people
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Main Reliefs / Exemptions
Smaller Reliefs / Exemptions
• Combined Threshold on death of Spouse
/ civil partner (currently £650,000)
• Annual exemption £3,000
• Lifetime Transfers to spouse / civil partner
• Normal expenditure out of income
• Gifts more than 7 years before death
• Gifts on Marriage
• Business & agricultural property
• Non Domiciled individuals – overseas
property
Your Personal Balance Sheet
Husband & Wife Balance Sheet
Add up all your assets and liabilities
• Will you (or more correctly will your children
after your death) have an IHT problem?
House
Value of Business
Cash & investments
• Can you use any of the exemptions?
Total estate
• Do you have any assets you could afford to
give away?
850,000
1,000,000
1,300,000
£ 3,150,000
Do you have an IHT problem? – YES!
Can you use any exemptions?
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Can you use any exemptions?
• 100% Business Property relief – a very
valuable exemption
• Some restrictions – and traps for the
unwary, e.g. qualifying period of ownership,
buyout clauses in shareholder / partnership
agreements, non-qualifying assets, assets
owned outside the business
• On death assets are revalued to market
value for Capital Gains Tax: tax-free uplift
Husband & Wife Balance Sheet
House
Value of Business (exempt)
Cash & investments
Total estate
IHT Threshold (joint)
Taxable estate
850,000
1,300,000
2,150,000
(650,000)
1,500,000
Tax at 40%
600,000
Can you give anything away?
Giving it Away
• Exemption for gifts more than 7 years
before death – another most important IHT
planning tool
• Do you have assets you can afford to give
away?
Giving it Away
• Are your children / grandchildren mature
enough to receive assets in their own right,
or should you consider a trust
arrangement? - Peer
• Do not leave yourself short of money in
your retirement – IHT is your children’s
problem, not your own!
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Giving it Away
The Family Home
• There may be other tax implications of
transferring assets
• Very difficult to give away the family
home for tax purposes and still live in it
• In particular Capital Gains Tax – there
may be a tax change based on the market
value of assets when they are given away
(watch the gains on the investment
portfolio – you may get a GCT bill)
• Gifts with Reservation and Pre Owned
Asset rules designed to stop this
Husband & Wife Balance Sheet
What else can you do?
House
Value of Business (exempt)
Cash & investments
Total estate
IHT Threshold (joint)
Taxable estate
Tax at 40%
850,000
1,300,000
2,150,000
(650,000)
1,500,000
600,000
• Value of family home at death remains
the Government’s largest source of IHT
Nothing:
• Hope that future Conservative Government
will honour its promise and extend exemptions
to £2 million or possibly abolish the tax?
(timescale?)
• Leave children to pay tax on your death – after
all they will probably inherit far more than you
did! (a number of clients do take this view)
What else can you do?
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What else can you do?
• Reorganise assets / investments
• Insure to provide funds to meet the tax –
long or short term
• Other insurance based solutions –
Discounted Gift Trusts etc
Do Take Professional Advice
• Many traps for the unwary, especially in
giving away assets, and with business
property, or if you are of foreign domicile
• Under no circumstances do a “DIY will” –
the few pounds you will save in fees will be
lost many times over in tax / legal costs /
family disruption after your death
- Jason
In Summary
A couple more Quotes to Finish
• If you have total assets worth less than £325,000
(£650,000 for a couple) you do not have an IHT
problem**
One humorous:
•This threshold may rise to £1,000,000 (£2m per
couple) if the Conservatives gain power which will
change the picture completely for most people
“Death and taxes and childbirth! There’s
never a convenient time for any of them”.
(Source: Margaret Mitchell in Gone with the Wind)
• If your assets are over the threshold, or are likely to
be in the foreseeable future, you should think about
IHT planning. The earlier the better – and take
professional advice before you do anything!
(** Provided you have not given anything away in the last 7 years)
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A couple more Quotes to Finish
One more serious:
"Usually in times of difficulty the few who
have money help the many. Only the
Conservative party says that in times of
difficulty the many should come to the aid
of the few.”
(Source: Gordon Brown, trying to sound a little like Winston Churchill
in his Battle of Britain speech, commenting on Conservative proposed
increase in IHT Threshold to £2million per couple. March 2009)
INHERITANCE TAX
Ken Jones FCA CTA
Tax Partner
BURGESS HODGSON
Burgess Hodgson has again been short listed
for the Accountancy Age awards national Medium
Firm of the Year, having been a finalist in 2007.
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