/ Money

How will inheritance tax affect you?

Hands and house

Traditionally the preserve of the very wealthy, inheritance tax (IHT) looks likely to catch far more of us in the next few years – as the threshold remains frozen at £325,000 and house prices continue to rise.

In our recent survey, 55% of Which? members had an estate worth more than the nil-rate band, and 26% exceeded the double allowance of £650,000 that married couples and civil partners can effectively claim (the first partner’s unused ‘nil-rate band’ passes to the survivor).

Saving IHT (or escaping it altogether) is easier for some people than others. If your estate is mostly property, it’s hard to get round paying IHT if you go over the limit.

Giving away the house you live in is not accepted as a genuine gift by IHT, even if it’s something you want to do. Unless you pay commercial rent to the new owners (your children) or plan to have them live with you and split the household bills 50/50, escaping a final tax bill is almost impossible.

If your assets are more varied, however, there are ways of reducing your final estate and cutting IHT…

Making lifetime gifts

The simplest is to make lifetime gifts. You can give away £3,000 each year with no impact on your £325,000 allowance. Larger gifts may also be tax-free, but only if you survive for at least seven years after making them. Called potentially exempt transfers (PETs), they can be for any amount.

Gifting assets early obviously makes sense, but how soon should you start? You don’t want to risk leaving yourself and your partner short – but delay too long and you risk being caught by the ‘seven year rule’…

To save on IHT, gifts have to be genuine and irrevocable, so ‘giving it all away’ isn’t something to be undertaken lightly. Smaller, regular gifts may be safer than enormous one-off transfers – and over the years these can still mount up to a tidy amount.

It’s worth remembering that it’s only the ‘excess’ above your nil-rate band that is hit by IHT (at 40%) – the bulk of your estate may survive intact, with only a small bill for your heirs.

Back on the agenda?

With an election in the offing, IHT has the potential to become a hot topic once more – as it was in 2007, when George Osborne’s pledge to increase the nil-rate band to £1m led the then Chancellor, Alistair Darling, to introduce the double allowance for married couples. In office, Mr Osborne has instigated a nil-rate band freeze until 2018, but the Prime Minister recently repeated talk of a £1m threshold, so perhaps a change of plan is afoot?

What do you think about IHT? Is it worth trying to avoid, or shouldn’t people concern themselves with something their children may not have to pay?


I can understand the logic of, and accept, certain taxes – something has to pay for running the country, crudely based on the ability to pay. However I have bought my assets – house and investments – out of hard-earned income that has already been taxed. I do not pay more tax, while I live, on their capital value; I do not see why I should then pay tax on them when I unfortunately depart this world. Nor should I have to accept the lottery of passing on gifts to my family hoping I’ll last another 7 years. Nor, if I give them the family home, should I then have to pay them market rent to continue living in it (otherwise it is not exempt from IHT). The rascalls might evict me, anyway.
It is unrealistic to expect IHT to be abolished. It needs reforming into a fairer tax. I would exempt the family home – particularly as the value depends so much in which part of the country you live. Then a tax-free threshold (not everyone would benefit from home ownership) as now of around £325 000. The balance I would tax in increments – 10% on the first £200 000, 20% on the next, with a limit of 40% on over £600k.
Incidentally, unless it has changed since I did it, you cannot get probate (that is necessary to get assets released to the estate), until you have paid the HMRC IHT based on the estate valuation. So you will have to raise a substantial loan at market rates to cover this. If your main estate asset is a house, it can take a good deal of time to sell at the market value – so your loan could be quite costly. Has this changed?

I think you are right, Malcolm. If the application for probate is based on an estimated nett value of the estate that exceeds the tax-exempt threshold then the estimated IHT needs to be cleared before probate will be granted. If the sale of a property is involved – and this can only be done by the executor or administrator after title of the property has been formally transferred into their ownership which in turn can only be done after probate has been granted – then there is a period of one year for any correction of the IHT acccording to how much was realised on sale of the property and how much that increases or decreases the declared estate value. If the property is, under the terms of the will, or the intestacy rules in the absence of a will, to be transferred to a beneficiary or relative[s] as appropriate then a realistic valuation as at the date of the transfer has to be established and that again could be more or less than the declared estate value and require a correction with HMRC. It is nearly always inevitable that a loan will have to be raised to meet the IHT payment before probate; if the estate contains savings, investments and bank balances, and other assets that can be quickly reduced to cash, the duration of the loan can be reduced or it can be partially repaid as the money comes in. If property forms the bulk of the estate then the loan might have to stand in place for several months with interest rolling up. Many executors resort to auction sales as a way of quickly releasing asset value but it might come at a cost in terms of value achieved – although not always . . . bit of a gamble really in current markets. The ordinary man in the street hardly had to bother about IHT years ago but with high property values in metropolitan areas and certain other hotspots this has become a great anxiety. Having to get a loan drives executors into the arms of banks and more obscure financial institutions who might also want to get a piece of the action in dealing with the estate.

DeeKay says:
16 April 2014

It’s a tax on the dead FFS!! Shouldn’t be allowed.

Problem is, it raises a huge amount of revenue that would have to come from somewhere else.

Susan says:
17 April 2014

IHT doesn’t raise a ‘huge amount of revenue’. The cost of collection almost nullifies the amount charged.

“HMRC figures show that 34,000 estates paid the tax in 2006–07, falling to 15,000 in 2009–10. They also show that receipts fell from £3.6bn in 2006–07 to £2.4bn in 2009–10.

A fall in revenues is also down to the cost of collection. The price of collection in the 2008-09 tax year increased by 0.29p to 0.99p for every £1 of IHT revenue, in spite of a decrease in revenues from £3.8bn to £2.8bn, suggesting that the marginal cost of collecting IHT is lower than the average cost, and that a further fall in revenues is likely to be accompanied by an increase in the average cost of collection.

Therefore, with revenues falling and profit margins being stretched by higher administration costs, is IHT sustainable or should the government look for alternative, more cost efficient ways of taxation?”

Spending the collection cost on recovering money from tax evaders instead would seem a much better – more profitable and more just – use of scarce resources. Then scrap IHT.

Thank you, Susan, for your update on the nett revenue from IHT [after collection costs]. I was under the impression that IHT virtually collected itself through the probate system – I hadn’t realised it was so unproductive. Obviously, that must be partly due to the introduction of the married copule allowance which has doubled the threshold in many estates. In view of what you have revealed I go along with Malcolm and say scrap IHT, step up the action on tax fraud and evasion, and let capital gains tax do its work on property disposals.

I didn’t mean to type “copule” in line four above of course, but I quite like it as an addition to the vocabulary for certain occasions.

Mark says:
17 April 2014

“IHT doesn’t raise a ‘huge amount of revenue’. The cost of collection almost nullifies the amount charged.”

“The price of collection in the 2008-09 tax year increased by 0.29p to 0.99p for every £1 of IHT revenue”

I don’t understand how these two statements go together. A collection cost of 0.99p (pence, not pounds!) per £1 of revenue means that 99.01 pence out of every 100 pence of IHT go to the exchequer after costs.

Yes Mark, there was a misunderstanding. I took the previous comment on the poor collection yield of IHT at face value without pausing over the numbers. At under a penny in the pound in collection costs this is, indeed, a highly efficient tax and we are back to the question of replacing the revenue to the Exchequer if we abolish IHT, so reform to make it fairer across the country and less dependent on property values is probably the answer. The same issues are bedevilling Stamp Duty Land Tax at the moment where ‘hard working people’ in London and the home counties are having to pay 4% on the entire purchase price of a fairly ordinary house. And if such a property is sold after probate the Exchequer gets a bonus of 4% on the purchase on top of the 40% on the amount above the exemption threshold collected through IHT on the value of the estate!

I believe you can reduce the amount of IHT from 40 to 36% if in your will you donate 10% of the nett value of the estate to a registered charity or charities who are tax exempt.

I don’t think this Govt’s pledge to increase the nil rate band to £1m is entirely realistic but a review of the increases in house prices is badly needed and is way overdue, especially for people living in the south as Malcolm has suggested.

Considering how few people/estates actually end up paying IHT and then only on the excess , unlike Stamp Duty, I really dont see why so many people get so upset about IHT.
The estate doesn’t pay any capital gains tax on any of its assets and yes it is a tax on the dead – exactly even better.

Besides the amounts that can be gifted to individually free of IHT it is worth remembering that regular gifts that do not affect your standard of living are also free of IHT and are in addition to the lifetime gifts mentioned. So paying a fixed amount into an ISA or Pension plan of a child or grandchild every year would be exempt.

People get upset because many will own homes valued in excess of the threshold, and like their other assets will have been paid for out of income that has already been taxed. It is a tax that affects the living – your family for whom you have worked and saved.
We need to focus more heavily on those who try to escape paying their income tax.

In effect Robert you allude to the recommendation that people who have not wasted their hard earned money which has been taxed and taxed and taxed during their lifetime should once again be taxed after they cease to exist! This assumption does nothing to incentivise younger up and coming entrepreneurs but also stifles innovation, creativity and ambition if you are not supposed to live in a dwelling above the £325,000 threshold,

Governments are responsible for managing the economy which includes the fluctuation in house prices, but still expect to take [ their share?] of your lifetimes careful budgeting when you cease to exist. Young people today are reported to need an income of at least 40k to get onto the housing ladder in the south and most would welcome a little help to achieve this when it is no longer needed by you. The alternative is rented accommodation [or move north] where they are tied to paying out dead money to landlords who have most likely mortgaged the property they live in anyway. At the other end of the spectrum however, many elderly people rely on their savings to top up their income, but these are currently being eroded by the pittance they receive in interest and unless you are in the unfortunate position of knowing exactly when you are going to expire, it is a case of either spend and sponge off the taxpayer for the remainder of your retirement or keeping your home, your independence and your dignity with the added bonus of knowing you are able to leave something for your loved ones after you are gone but not a sum pre determined by Government.

Governments have already taken what amounts to their share so let’s raise the IHT threshold to say a more realistic £500,000 to keep up with inflationary pressures, or perhaps abolish it altogether.

Well said Beryl.

There is another tricky problem linked to this. A large number of elderly people choose to share a house. They are not married or registered civil partners but they are joint owners [i.e. they hold it under a “joint tenancy”]. This carries rights of survivorship so that the surviving joint owner is not immediately dispossessed when the first joint owner dies [and the ultimate survivor would usually end up in sole ownership]. There are lots of possible permutations in what could happen, but, simply put, the survivor’s estate cannot benefit from the double IHT exemption threshold available to married couples and registered civil partners. For many people in that position, a marriage or civil partnership of convenience might not have been an option that appealed to them but the beneficiaries of their estate might hold a more mercenary view as they watch 40% of everything over £325k [nett] pass to the state.

The permutations as you so succinctly put it John can be very complex and unfair, especially for single people and divorcees. When nearly half of marriages in the UK are now ending in divorce, this can create problems for the partner of that marriage who chooses to remain single, or as you say cohabits, for IHT purposes. For example, if a married couple split and one of them remarries producing no children, when one partner from this second marriage passes away the remaining partner with no children automatically carries the double IHT exemption, whereas the remaining single partner with children from the first marriage automatically loses the double exemption upon divorce, which as you rightly say, can cause a more mercenary view for the beneficiaries [usually the children] when 40% of everything over £325K passes to the state. The solution surely would be, upon divorce the double exemption should remain for the benefit of the children for it is they who are being penalised at the end of the day.

I know of married couples who were savvy enough to enter into a joint tenancy agreement for tax purposes before the government decided to inaugurate their double IHT exemption policy, so In retrospect they really weren’t doing married couples any favours. What they failed to do, in fact, was consider the innocent offsprings of divorcees [as well as those from cohabitants] who are the ones who will miss out.

A much fairer solution for each and everyone would be to abolish this unfair tax altogether.

Firstly, its most important not to let the tax tail wag your lifestyle dog.

Ask yourself why you are accumulating wealth? If it is for security then the tax is immaterial as your security is the most important thing. If you have more than you need, why not start giving it away? Otherwise, why are you keeping it? Your kids may be a little less likely to waste it if they know you can see what they are doing with. They can easily waste it when you are dead. The key issue though is not to give away what you can’t afford to be without as once your kids have it, there’s no guarantee you’ll ever see it again.

Yes, some tax might have to be paid. IHT in relation to your property doesn’t have to be paid all at once, it can be paid by instalments over 10 years, with the outstanding balance paid on sale. Yes, the outstanding amount normally carries interest, but usually at a lower rate than you will get a loan. Most banks will also release cash for payment of IHT – there is a specific HMRC scheme for it.

Owning a property as joint tenants simply means a property passes to the survivor automatically on first death. It is right for some, but tenants in common, where it is controlled by your Will or intestacy, is right for others. It depends on your circumstances and whether you have other considerations eg. care fees, or whether you have children from a former relationship.

Wills are not the cheap, give away product most people like to think they are and the more complex your circumstances are, the more you need it doing professionally (as Which? rightly point out). If you want it cheap, why pay at all when you can get it for free on the internet, but you’re more likely to get what you ask for rather than what you need.

That charity gift to reduce your IHT rate to 36%? That’s fine if you want to be altruistic, but on a £1m estate the net available for your family after tax is £730k with one Nil Rate Band, or £860k with two. After taking into account a £100k charity donation as well, the net amounts are £693k or £810k respectively. The charity gets £100k, HMRC gets less, but so does your family.

And whilst I’m about it, “Property Protection Trusts” – why do people think solicitors are expensive and yet will attend a slick seminar where lots of promises are made which can’t all be effective, as they arise in contradictory situations, but then part with several thousand pounds on the promise of a scheme that will do everything without any evidence that it can? As ever, if something sounds too good to be true, it normally is, and its time Which? looked into the veracity of these schemes. Many well drawn Wills incorporate the elements of these schemes that do work FOR YOU for a fraction of the price.

If you are worth enough to worry about IHT then, with all due respect, pay to get some proper advice from a solicitor or accountant that is relevant to YOUR circumstances. You may find that the advice soon pays for itself. Yes I am a solicitor, but felt compelled to submit this post due to a lot of inaccuracies in the posts above.

Its your wealth, enjoy it, and don’t let tax become the be all and end all.

David, thanks for your contribution. What these conversations need, and often lack, is input from experts to ensure that comments are responded to with fact, so the conversation can be kept on a rational course.
The only problem I see with the current IHT system is that you cannot exploit it properly as you do not know when you will leave this earth. You cannot therefore calculate how much to retain to live on in the manner to which you wish to be accustomed until the bitter end.
I also resent having to pay tax – even in my absence – on stuff I’ve already paid tax on to acquire. Seems like a sneaky trick when my back is turned.

I agree with Malcolm that it is always good to hear professional advice, which is the reason why I paid £400 for a reputable law firm to draw up a will to suit my own circumstances. As Malcolm illustrates though it’s not entirely a black and white situation when you have no idea when you are going to pass on and who benefits when you do. Is it the state or your beneficiaries? What amazes me as someone uninitiated in such matters is why is it ok to leave money to a charitable organisation who are exempt, when you are unable to leave money to a disabled child without resorting to trust funds which are normally managed by solicitors who charge for their services. I understand this was possible sometime ago but was then scrapped.

The fundamental issue here is about fairness and why some people are allocated more exemption than others. I have no problem at all with people who have wealth if it has been earned fair and square and the appropriate amount of tax has been paid.

There are countries who pay no inheritance tax at all, i.e Canada, Australia, Sweden and IHT is exempt on property in some countries but employ other systems such as CGT. Again whatever system is employed it’s about fairness for everyone.

I hear what you both say, but that’s a political matter and i’m not sure that’s what this forum is really here to debate.

We have a system, and we have to work with it and if we didn’t have this tax, we’d have another. It will always be the case that what suits one won’t suit another.

And don’t forget, a lot of people haven’t paid out of their net income for their house value – they worked to pay off the mortgage for what they originally paid for it – all the increase in value subsequebtly has been down to good old house price inflation.

Food for thought…

The unfairness remains that this is a tax upon a tax. We should not have to continue with a system just because it exists if it is unfair. Particularly when many individuals and corporations find ways of escaping payment of much larger amounts than IHT collects.

Does fairness really exist ?
Some people will always pay more tax or even tax at a higher rate – is this fair?
IHT is a tax on the transfer of assets after death, it has a large threshold and tax is only paid on the excess ( unlike stamp duty).
I do not see it as being anymore fair or unfair than other taxes its just part of the system of raising money for government to spend on our behalf.
Tax on tax occurs elsewhere e.g. VAT when buying goods using taxed income, CGT in some circumstances.

I agree with the comments that uncertainty about costs related to care or nursing support doesnt make it easy to plan how much money to give away while still alive.
Index linking of the IHT threshold could also be considered but purely personally I would rather Stamp Duty was changed from its step function basis .

I agree that reforming stamp duty should take priority. The step change from 1% to 3% at the £250k mark has had a very depressant effect on some property values in my part of the country. It has reduced the value of estates significantly and made life harder for executors as properties take much longer to sell. Counterbalancing that, IHT is probably less of a concern than in London and the south east.

Please do not be under the impression that this tax will only affect the rich. The average house price in the South East is now worth £316,000 and in London £430,000. Unless something is done to curb the increase in house prices pretty soon, it’s only a matter of time before more peoples’ property exceeds the tax exempt threshold of £325,000, which is set to remain until 2018 according to The Tax Alliance.

Income earned is taxed once and then taxed again when invested in house purchase with stamp duty and taxed again at 40% when the owner dies. You effectively paid your share of tax on your home when you purchased it.

I fail to see why this subject is not of a political nature since government are responsible for setting tax rates. It is because we have consumer groups such as Which? that members of the public can make their voices heard and not just be expected to accept the status quo when such important matters as IHT, or any other tax for that matter, are raised especially when married couples enjoy the discriminatory privilege of paying less tax than single people.

Taxes must be paid but let’s keep it fair.

While I go along with what David Satchell has said above, the fact remains that a lot of people have not taken good professional advice on their affairs and the legal profession does not enjoy the trust that perhaps it should among the population at large. Despite the wealth of guidance issued and the warnings about the implications of inadequate planning, there remains a reluctance to attend to certain matters. I know from several personal experiences within my own family circle that the executors or administrators of estates have found it far from easy to wrap things up quickly and easily although the beneficiaries seem to think it is so straightforward! And now that peole are living well into their upper eighties and nineties, the executors themselves might be in their seventies [and taking ten years to settle the IHT is not an option]. Although they can instruct a solicitor or probate specialist to act on their behalf, they fear that they will lose control of the process and see the costs go through the roof. I know this is what can happen when people are steered by the bank into the hands of a commercial probate service.Jjust as we saw in a recent Conversation about estate agents, there is a dislike of entering into a percentage-based fee arrangement as there is a suspicion that there will be no incentive to keep costs in check.

Another point is that it is easy to say that people could give away more of their wealth while living, but in a high proportion of cases it is tied up in their property and not available for timely disposition as the years tick by.

Peter Finch says:
25 April 2014

Beware of trying to minimise IHT by using the expression ‘free of tax’ in a will as in certain circumstances this can lead to a trap of ‘grossing up’ and the payment of more IHT than necessary. It is tempting to give legacies ‘free of tax’ to named individuals and then leave the residue of the estate to a tax exempt beneficiary such as a spouse or a charity. HMRC have a way of handling this which is best explained in http://www.hmrc.gov.uk/cto/handicard.htm which contains a worked example. As an executor I acted in accordance with the wishes of the deceased and paid all the IHT I thought was due, only to be landed with a further bill for unpaid tax due to this rule.

jack says:
13 April 2016

I have got to say it was the exact opposite with me. I have been using a wealth management firm for years, this is the main reason my accounts and investments today have been so successful.

[Sorry Jack, we’ve edited your comment as we don’t allow promotional content on Which? Convo. Thanks, mods.