Financial Matters

With David Frederick FCCA | Marcus Bishop Associates | marcus-bishop.com

Inheritance Tax Double Strike!

Inheritance tax (IHT) in recent times has become a mainstay in conversations about UK taxation. Whereas, IHT was once considered a tax that only fell into the domain of the wealthiest within society. However, in recent times there has been a notable change based upon the discussion about inheritance tax. Has society really become wealthier? Or has there been something else happening within society?

IHT has the label of being the most unpopular tax in the whole diet of UK taxes. This is rather interesting when one recognises that unlike PAYE, only 4% of UK deaths results in the payment of IHT. Moreover, in 2021-22, IHT receipts of £6.1bn was less than 1% of HMRC’s total tax receipts. These observations, begs the question, why has such a minor tax in the UK tax system raised so much concern in society?

IHT is the UK tax that is paid on the estate of the deceased before the estate can be transferred to its beneficiaries. A major misunderstanding by some taxpayers is the IHT rate of 40%. The IHT rate of 40% is only payable on estates in excess of the IHT exemption threshold of £325,000. Furthermore, many estates enjoy additional allowances to reduce the amount that is chargeable to 40% IHT. Some estates enjoy the luxury of being granted an exemption of £1million.

Despite only 4% of estates being subject to IHT, the tax has become unpalatable primarily due to the acceleration in residential property market prices and IHT drag. The continual acceleration in residential property market prices has seen more estates enter the IHT purely based upon economic market forces. In SE21 and SE22, a residential property under £325,000 is a mystical illusion!

More the drag into the IHT net has arisen due to the threshold IHT of £325,000 being set in place since 6th April 2009 has not and will not be reviewed until 5th April 2028.

Therefore, its existence for the past 20 years has seen a greater proportion of estates caught up in the IHT net. Hence, IHT is no longer a tax solely within the domain of the wealthiest in society. Or maybe it is!

If the pain of being dragged into IHT is not sufficient, HMRC has recently set their eyes on IHT. This follows their recent successful campaign when they clawed back a record breaking £326m. A tax that yields less than 1% of receipts for HMRC is now attracting so much attention. The real problem and concern are for individuals who seek to tackle the IHT of deceased estates without professional assistance. However, it appears that HMRC are focussing on estates with a valuation of £2m and above. Nevertheless, all estates should be mindful and are at risk of the eyes of HMRC. For all executors undertaking IHT activities without professional representation, three main areas of concern should be addressed.

Valuation of residential property

A common approach is to obtain an estate agent or three estate agent valuations. This is a major area of attention for HMRC, therefore it is always advisable to obtain a RICS (Royal Institute of Chartered Surveyors) valuation.

Gifts in the past seven years

Any gift within the seven years before the date of death will have an impact upon the IHT. Therefore, unrepresented executors should undertake careful and forensic like investigation to identify the existence of any such gifts.

Valuation of personal chattel

Best guess or an estimated valuation for jewellery, works of art, or even second-hand cars should be avoided. The expediency of estimates do not outweigh the reliability and correctness of seeking a professional valuation. Never before has such a minor tax generated so much attention and pain in the UK, as IHT