Autumn Statement inspired an IHT wheeze? Beware the pitfalls

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, comments on the Chancellor’s Autumn Statement, asking if it inspired an IHT wheeze and to beware the pitfalls.

Key points for consideration:
    • The inheritance tax nil rate band has been £325,000 since April 2009 and is now frozen until at least April 2028.
    • The residence nil rate band hit £175,000 in April 2020, and is also now frozen until April 2028.
    • According to the ONS, the average property was worth £295,000 in September and in London it was £544,000.
    • In June this year, inheritance tax receipts pushed through £700 million in  month to hit a record monthly high.
    • In April 2021-22, HMRC collected £6.1 billion in inheritance tax – the highest on record. In the first five months of the current tax year (to September) they have received £3.5 billion. New figures are released tomorrow at 7am.
Sarah Coles says:

“The average property has gained £65,000 since April 2020 – just after the pandemic broke out, but the inheritance tax threshold and the residence nil rate band haven’t budged.

“Thanks to the Autumn Statement, neither of them will before April 2028 at the earliest. If rising prices have persuaded you to consider whether there’s a way around paying this tax, it’s worth being aware of the pitfalls. In some cases, IHT wheezes can cost you more than if you’d just faced up to the bill in the first place.

“If you have a significant estate to leave, there are six approaches that are commonly considered for tackling IHT. And while one of them might work for you, they all come with possible problems.

“If you want to be absolutely certain you’re not leaving an IHT headache behind, then it may be worth taking out a life insurance policy to cover your tax liability. This should be written in trust, so it falls outside of your estate, and there’s no IHT to pay on it.

“If you insure your bill, you don’t get the satisfaction of beating the taxman, but you are preventing him from causing problems for your loved ones after you’ve gone.”

6 common considerations – and their potential pitfalls:

1. You can give gifts during your lifetime. You have a gift allowance of £3,000 each year that falls out of your estate immediately for inheritance tax purposes. You can also give small gifts of up to £250, specific gifts for family weddings and unlimited regular gifts from income. You can carry forward unused annual allowances for one tax year. This can be an incredibly useful way to cut your tax bill, but you need to be confident you’re giving away money you won’t need later. None of us can know if we will eventually need care, when we may regret giving so many of our assets away.

2. You can make gifts of any size (known as potentially exempt transfers) and as long as you live for at least seven years after handing it over, it falls outside of your estate for inheritance tax purposes. This has the huge advantage of you being able to see your family enjoy their inheritance and can be a useful solution. However, not only do you run the risk of needing the cash later, but if you die within this period, you may pay at least some IHT on this money too.

3. If you try to give away your home before you die, but continue to live in it or benefit from it in any way, it won’t be counted as having been given away at all. So, you’ll have paid for the legalities of swapping ownership without any benefit.

4. If you buy into a scheme that puts your home into a trust in an effort to avoid IHT, there’s no guarantee that these schemes will work, because the taxman may consider them to be tax avoidance. There are also significant costs to consider.

5. If you release equity from your home and spend the money or give it away, it could cut your IHT bill, but you need to factor in the up-front costs and the ongoing interest. If you don’t live for seven years you could save far less than you expect (under the rules around potentially exempt transfers). If you live for much longer, you could end up spending more on equity release than you would have on IHT (because of the interest).

6. Some investments are free of inheritance tax, such as qualifying investments on the Alternative Investment Market. However, not all shares on this market qualify, and those that do will be smaller and newer companies, which are high risk investments, so should only be considered as a small part of a large and diverse portfolio, and only then if they suit your circumstances.

The rules:

We all have an allowance of £325,000 of assets we can pass on without paying any inheritance tax. You also have a second allowance you may be able to take advantage of: the residence nil rate band. This was gradually introduced between April 2017 and April 2020, and is now £175,000. It applies when you leave your main home to a direct descendent.

On 9 October 2007, the rules changed so that anyone who is married or in a civil partnership who passes away can use as much of their allowance as they want, and the rest can be transferred to their partner. It means you can leave everything to your spouse -including your home – and their annual allowance doubles to £1 million. This applies even if your spouse died before October 2007 (although the amount transferred will depend on the allowance at the time).

If your full estate is worth over £2 million, this allowance tapers away at a rate of £1 for every £2 it’s over the threshold.

If you have downsized since July 2015, you may be able to get a downsizing addition, which effectively gives you the same residence nil rate band as you would have had if you hadn’t downsized.

 

Kindly shared by Hargreaves Lansdown

Main article photo courtesy of Pixabay