Issues affecting the rise of IHT (Inheritance Tax)

ARTICLE

Issues affecting the rise of IHT (Inheritance Tax)

By Jim Sisson, Chief Financial Officer, Tower Street Finance

The rising value of inheritance tax (IHT) receipts has highlighted how some families could potentially face a major surprise when handling a loved one’s estate.

HM Revenue & Customs (HMRC) recently revealed IHT receipts for the Financial Year 2021-2022 were greater than £6bn for the first time (up from £5.2bn in the previous 12 months) 1 .

HMRC stated that higher IHT receipts reflect ongoing increases in the value of taxable assets (especially ongoing increases in the value of residential property). Although HMRC introduced various Nil Rate Bands, these have been held at historic levels, meaning, where the value of assets are increasing, more estates are becoming taxable. We thought we’d explore some of our recent insights into IHT and the factors that affect it.

Property prices

The Halifax House Price Index for August 2022 2 revealed that the average house price now stands at £294,260, with prices rising by 0.4 per cent in the month. It added that prices have now reached an annual growth rate of 12 per cent, all despite a backdrop of rising interest rates and macro-economic uncertainty.

Property is often a key part of a person’s estate, so – with prices increasing – the value of estates will inevitably continue rise with the associated impact on IHT.

Property investment portfolios

There are a host of products attracting investment, but property investment continues to be a major draw for many.

The recently published English Private Landlord Survey 2021 3 explored the reasons for becoming a landlord. A perception of lower risk and higher returns continues to drive investment in property compared to other assets. Property is often cited as an alternative to a traditional pension, as well as providing a supplemental income to those with access to liquidity.

The increase seen in property prices continues to be a major talking point. For executors, property portfolios can be a key issue when dealing with Probate.

New IHT considerations

HMRC continue to develop their guidance on assets applicable for IHT. A recent example is Cryptocurrency. Investment in Cryptocurrency has become increasingly popular, hitting all-time highs in 2021, despite its high volatility.

Difficulties in calculating IHT liabilities include establishing where assets are domiciled for tax purposes, establishing the value of assets, and dealing with any changes in value of assets between death and encashment.

HMRC continues to wrestle with these issues as the law around Cryptocurrencies catches up with the marketplace. However, their 549-page consultation document 4 has gone some way to clarifying the rules and has been welcomed.

Overall estate value

The Telegraph recently reported 5 on HMRC figures that highlighted a rise in the number of inherited estates valued at more than £1 million. It is thought that the figure has risen by more than a third in five years.

These trends may mean that estates are likely to be worth a lot more than people realise. This in turn could leave many families facing a major financial shock when a loved one passes away, as they may see larger-than-expected IHT bill.

HMRC rules and dispensations

HMRC’s general position is to insist IHT is paid before Grant can be obtained. This creates the well-known “Catch 22”, where IHT must be paid before the Estate can be encashed. IHT is a personal liability of the Executor, and it is the Executor’s responsibility to pay IHT.

HMRC does provide some help. Payment of IHT arising on property can be made by instalment (although these instalments can be sizeable in themselves). As a final resort, HMRC may offer a Grant on Credit. However, this decision is discretionary, given as a last resort and can be subject to agreement to make payment at a specific point in the near future.

HMRC is becoming increasingly reluctant to provide Grant on Credit. Recent communication from HMRC has included a demand to provide documentary evidence of an application for, and a decline, of credit for the Executor before the dispensation will be considered.

Therefore, obtaining a Grant on Credit is far from straightforward or certain.

Probate lending

Funding an IHT liability through traditional lending is not an attractive choice for most executors (and may not be a possibility for many). Traditional lending will certainly require a personal liability and may require the Executor to accept a charge over their own property.

Probate Lending is a new and growing market in the UK. Several providers have already appeared to help create a multi-millionpound marketplace with various products providing more effective solutions. Innovative lenders in this new sector focus on the estate as the source of repayment, avoiding the need for credit checks and personal liability for the Executor. Loans are repaid from funds liquidated from the estate, meaning no monthly repayments.

Probate Lending is increasingly seen as the attractive choice for payment of IHT. ■

1. HMRC tax receipts and National Insurance contributions for the UK (monthly bulletin) – GOV.UK (www.gov.uk)

2. august-2022-halifax-house-price-index.pdf

3. English Private Landlord Survey 2021: Main report (publishing. service.gov.uk)

4. Updates – Cryptoassets Manual – HMRC internal manual – GOV.UK (www.gov.uk)

5. More families feud over wills as millionaire inheritances rise (telegraph.co.uk)