Caught in the middle

Not so long ago, inheritance tax planning would not have featured on the average person’s to-do list. Now, it is just as likely to be one of those things we say we must get round to, such as pension planning, seeing the dentist and sorting out home broadband.

The nil rate band is currently £325,000 and will remain so until the end of tax year 2017/18. Meanwhile, with average property prices in London now reaching £458,000 and £312,000 in the south-east (according to the Office for National Statistics in February 2014), more and more estates are being pushed over the threshold. Historically, IHT was intended as a tax on the super-rich, but is now a headache for most of Middle England.

I have always discussed IHT planning with my clients when they make a will, but gone are the
days when I lead the conversation by explaining how the tax works. Now it’s usually at the top of the client’s own scribbled agenda, and they know the damage. HMRC is also well aware of the impact the frozen nil rate band coupled with rising property prices is having.

Data released on 23 April 2014 shows that IHT receipts are nearly back to the record levels being collected before the transferable nil rate band was introduced in 2007, and research by the Institute for Fiscal Studies indicates that the proportion of estates liable to IHT will quadruple to 10 per cent of all estates by 2018/19, as compared with 2009/10.
A nice little earner, you might say.

Of course, the situation could change after the election. IHT has become a bit of a political battleground – further testimony to how important
it is these days – with the Tories hinting at raising
the nil rate band to £1m if they win. It remains to be seen what will happen. In the meantime, my clients have to take their own steps to keep their IHT bill down.

If they don’t, the price can be costly: financially and emotionally. I see this especially with couples. Dealing with the grief of losing a partner is terrible enough, but having to sell some of the assets you inherit to pay HMRC makes the situation worse, especially if that includes the family home.

Unfortunately, for most of us, there is no magic answer, but there are certainly things you can do to minimise or defer IHT. Use the spouse/civil partner exemption, I tell my married and civil partner clients, and don’t assume that if you have no will then everything will be spouse-exempt.

A will can help defer the IHT to the second death, allowing the survivor time to carry out
more serious IHT planning in the meantime to
get the bill down by the time of their death. I
have seen clients who have been unmarried for
most of their lives but opt to marry on their
death beds to save IHT. Unromantic it may be,
but taking a social standpoint on this particular
issue can be expensive.

Use the available reliefs, such as for business property and agricultural property. But don’t stop
at just investing in those assets; make sure you bank the relief. Check that you satisfy the conditions,
and watch the nasty apportionment trap when writing your will so that the relief is not wasted
on IHT-exempt beneficiaries, for example your spouse. Use any available transferable nil rate band, consider lifetime giving, and think about life insurance. I could go on...

Although the message on IHT is usually bleak, there are definitely things you can do to help, if
not eradicate, the problem.

Fay Copeland is partner and head of private client at Wedlake Bell

She writes the regular comment on inheritance in Private Client Adviser