Managing Inheritance Tax under the Coalition Government

By: Priyanka Boghani
14-May-2010

What is Inheritance Tax?

Inheritance Tax (IHT) is usually paid on an estate when somebody dies. It's also sometimes payable on trusts or gifts made during someone's lifetime, defined according to HM Revenue and Customs. Most estates don't have to pay IHT because they are valued at less than the threshold (325,000 GBP in 2010-11).

Typically, the executor or personal representative pays Inheritance Tax using funds from the deceased person's estate. The trustees are usually responsible for paying IHT on assets. In most cases, the IHT is paid within six months of the ends of the month in which the deceased died after which, interest will be charged.

Inheritance Tax Exemptions

Exemptions on IHT are only applicable in certain situations: when it's your spouse or civil partner's estate, when it's a gift made to a UK registered charity, or if the deceased owned a business, farm, woodland or National Heritage property. Exemptions also apply if you survive for seven years after making a financial 'gift' to someone, when the gift is valued up to 3,000 GBP in the year, when it's a small gift of up to 250 GBP, or when it's a wedding gift.   The IHT threshold or 'nil rate band' is the amount up to which an estate will have no Inheritance Tax to pay. Since 6 April 2009, the threshold has been at 325,000 GBP.

Inheritance Tax plans under the Coalition government

Although the Conservatives had pledged to raise the IHT threshold so it applied only to estates valued at 1 million GBP or above.  However, in order to pay for the Lib Dem initiative of raising the income tax threshold to 10,000 GBP over a number of years, this plan has been postponed.

But is this a good idea?  The Unbiased.co.uk annual Tax Action campaign aims to help people recognise their tax liabilities and take steps to avoid unnecessary tax payments. The Tax Action 2010 report was based on specially commissioned analysis of HMRC and other official data. According to the annual Tax Action report 2010 from Unbiased.co.uk, inheritance tax is Britain's second biggest tax wastage area. Over a third of consumers had supported the Tory pledge to raise IHT threshold to 1 million GBP.

However, despite the fact that we're not going to see changes to the Inheritance Tax banding any time soon, there are still steps that you can take to reduce your tax wastage in this area.  The report outlines that UK taxpayers will waste nearly 2 billion GBP this year due to poor inheritance tax planning.

The report proposes better management of tax planning. It shows that one of the main causes of 'death tax' wastage is the inclusion in personal estates of the proceeds of life assurance policies. If 'written in trust', it will not be subject to inheritance tax. Most life assurance providers will give you the option of writing the policy in trust at no extra cost - but if your financial affairs are a little more complicated then it is worth paying a fee to have a solicitor help you with the trust-writing.

How should you handle your IHT?

Karen Barrett, chief executive of Unbiased.co.uk, suggested that, "In order to protect your family and loved ones, it is essential to have provisions in place for after you're gone. The easiest way to prevent unnecessary tax payments such as IHT is to visit an independent financial adviser (IFA) who specialises in tax planning advice."

An IFA with expertise in this field can dispense advice that is appropriate to the individual's personal and family financial situation. Barrett also suggests drawing up a valid will with advice from a solicitor. This is essential in order to "ensure your legacy does not involve leaving a large inheritance tax bill for your loved ones. By firstly seeking independent financial advice, you can calculate your assets in the most tax efficient manner."