It raises a large amount of money for the government
Total inheritance tax (IHT) receipts in FY21/22 equated to £6.1bn and is forecast to rise in 2023/24 to £7.2bn. This was up 14% from the prior financial year by £729m. However, total tax receipts for 2021 and 2022 equated to £915bn, meaning that IHT accounted for less than 1% of total tax revenues.
· Income Tax revenues for the same period were £225bn (IHT as a proportion = 2.7%)
· National insurance revenues were £161bn (IHT as a proportion = 3.8%)
· Corporation tax revenues were £68bn (IHT as a proportion = 9.0%)
· VAT revenues were also £143bn (IHT as a proportion = 4.3%)
Whilst £6.1bn certainly appears to be a large sum of revenues, in comparison to total tax revenues, (and in comparison to revenues generated by other taxes) it is clear that IHT receipts are relatively insignificant to a certain degree.
Only the very wealthy pay IHT
This is certainly a myth on the basis that an individual with net assets of £325,000 is not considered a “very wealthy” person. The £325,000 nil rate band (IHT exemption threshold) has been frozen since 2009, despite inflation. As a result, more individuals are finding that the value of their estates could be subject to IHT, even though they are average, working-class individuals. Whilst IHT is certainly a tax on wealth, it is not payable by just the wealthy. There are areas in this country where £325,000 will not even get you a one bedroom flat, let alone see you classed as “wealthy”.
Everyone will pay some form of IHT
Absolutely not. The IHT nil rate band means that if your net wealth is less than £325,000, no IHT will be due. In fact, statistics show that for the tax year 2019/20, only 3.76% of UK deaths resulted in an IHT charge. IHT is not payable where:
· An individual’s total estate is below the IHT nil rate band (£325,000)
· On property or assets which qualify for relief (e.g. Business Property Relief and Agricultural Property Relief)
· Where an individual makes gifts of assets and survives 7 years (PETs)
It is theoretically possible to be incredibly wealthy, and not have to pay any UK IHT whatsoever.
A property can be gifted, meaning no tax will be payable on it
This is partially true – property can be gifted with the general rule that you must survive a further seven years from the date you made the gift in order to avoid IHT. However, there are a number of considerations to be made.
Firstly, you must consider your capital gains tax (CGT) position. A gift of assets is usually viewed as a sale of those assets for CGT purposes at market value – whilst you may start your seven-year clock ticking, you may also incur a substantial CGT liability. Should you make a gift and die within that seven-year period, you could end up paying both IHT and CGT.
Secondly, it is important to evaluate what is considered a “gift” with reservation of benefit rules (GROB). Under these rules, gifts of assets will be ineffective for IHT purposes if it transpires that you have use of these assets within the seven-year period before your death. There is some relief should you pass between three-to-seven years from making a gift. This is called “taper relief” and reduces any tax payable each year after the third anniversary. Because, however, it reduces the rate of tax and not the value of the gift, it is only valuable if you are gifting more than your nil rate band (£325,000).
IHT only applies to property
This is a myth. IHT could apply to any asset, including land, buildings, shares in companies, money on deposit, jewellery, cars, paintings, etc.
Assets abroad are not counted for UK IHT
The worldwide assets (including non-UK assets) of a UK domiciled individual are subject to UK IHT. The UK situs assets of a non-UK domiciled individual are ONLY subject to UK IHT. Domicile is a complex matter of private international law, and it essentially means where a person has his “permanent home”. Therefore, a non-UK domiciled person may not be subject to UK IHT on his overseas assets as this will constitute “excluded property”.
However, for a UK domiciled individual, worldwide assets are included. The concept of domicile becomes more complex as the UK has a “deeming provision” whereby someone could be deemed UK domiciled depending on how many years they have been in the UK.
There is however a “pecking order” between countries, so if there is a liability to tax in Spain on a holiday home situated there, you will be given credit for the Spanish tax paid, so you will not have to pay tax twice.
What next?
If you need help or advice on your inheritance tax, please get in touch with Parminder Chattha or our private client team to ensure you don’t fall victim to any myths or mistakes.
