Don't believe the hype about paying IHT before you’re dead
There has been much coverage in the mainstream press surrounding new guidelines on Inheritance Tax (IHT) avoidance schemes and fortunately, I can report that it is a tad overblown, writes Tony Harris, IFA and founder of Contractor Money.
Many journalists have got carried away with the sensationalist story that HM Revenue & Customs will make you pay IHT before you die. Their story has its root in the HMRC power of ‘Accelerated Payment Notices,’ which are designed to force suspected avoiders to fork out the monies they are perceived to be avoiding up-front. The reality, however, of how this law interacts with IHT is somewhat less headline-grabbing.
The backdrop to the media stories is that IHT tax receipts are becoming an ever bigger source of government funding and as a result, it is easy for the public to get whipped up into a frenzy at the very mention of ‘death tax.’ So a rumour that HMRC will soon be taxing people before they die, if it is found that they are using trusts to avoid inheritance tax, is a powerful one.
Meanwhile, estimates already suggest that the number of estates being dragged into the £325,000 IHT bracket will increase by a third this year alone. In effect, the use of trusts above the IHT nil rate band of £325,000 is often already subject to a 20% charge. It's highly unlikely though that the Chancellor would allow a more wide-ranging definition of what is deemed to be an aggressive use of trusts in any new rules, given two things. First, we are in the run-up to an election and second, the Tories previously campaigned on a promise to hike the threshold to £1million. So drawing up such a definition would be political damaging to George Osborne and his party just at a time when they need support the most.
Even if Mr Osborne does dare to act by, say, waving through a proposal to secure 40% tax upfront (40% being the level of tax paid on a person’s estate) , then HMRC has reassured that such a move would only impact on a small number of the wealthiest Britons.
Still, if you do want to take some action but cautiously because you’re concerned that you or your older relatives will fall into the £325,000 IHT bracket, then it would be wise to start planning now to minimise the tax bill for beneficiaries.
Having an up-to-date will in place and gifting parts of someone's wealth away up to seven years before you die can all help to protect an estate from the taxman. As ever, our central message is not to leave it too late.
Generally-speaking, the massive increase in property prices over the last few decades will make this extremely disliked area of taxation more applicable to contractors in the future. Indeed, given the average property now stands upwards of £175,000 (according to the Land Registry), we are sure to see many more of our contractor clients enter the IHT band, so effective tax planning is essential to avoid charges at what is normally a tremendously emotionally-charged time.
Even the Revenue seems to realise just how unpopular IHT is, quite apart from how detested any move to bring it under APNs would be. In a statement, HMRC said: “The Government will not be asking taxpayers to make an accelerated payment of inheritance tax – which is due on death – during their lifetime.” That seems pretty clear-cut and refreshingly definitive to me. However, perhaps the devil will be in the detail, especially for people whose IHT trust arrangement is part of a scheme disclosed under DOTAS. Be aware - the devil will potentially be hiding in the Revenue’s response to the consultation on IHT avoidance when it is published, sometime after October. For now though the vast, vast majority of contractors shouldn’t believe the hype.
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