The COVID19 bill is coming due. One way or another, it will need to be paid. There may be a certain level of scope for the government to make savings. Realistically, however, it seems highly unlikely that there is enough scope for it to avoid raising taxes at all. If it does, or when it does, inheritance tax (IHT) is an obvious target.
What could happen with IHT?
There are several approaches the government could take to increasing IHT. Arguably, the simplest one would just be to increase the rate of IHT charged. It might do so in bands, effectively treating IHT similarly to income tax. Another alternative would be to reduce the threshold at which IHT is paid.
These options would be highly visible and potentially controversial. There are, however, subtler alternatives. For example, the government might also choose to scale back the main residence allowance (residence nil-rate band). It could also potentially reduce gifting allowances and limit tax exemptions for certain asset classes (e.g. business property).
It’s entirely possible that the government will implement a combination of all of these options. The changes could be declared as temporary. There is, however, no guarantee that they would eventually be revoked at all.
Even if they were, any adjustments could be years, possibly decades, in the future. This means that anyone with assets (such as a house) should be taking estate planning particularly seriously.
Managing IHT liability
The general principle of managing IHT liability is much the same as it has always been. You need to reduce your taxable estate as much as you can before your death. In fact, at a high level, the essential strategy is the same. Generally, only the details change as tax rules change. With that said, small details can make a big difference. That’s one of the many reasons why it can be so helpful to get professional financial advice.
Understanding gifting and its tax implications
There are two key points to understand about gifting. Firstly, gifts have to be exactly that. You have to give up all beneficial interest in the asset. Secondly, gifting can have tax implications for both the donor and the recipient. For example, if you gift a valuable item, you may find that you become liable for capital gains tax.
One of the biggest advantages of starting your estate planning early is that it can make it much easier to manage your tax liabilities. For example, instead of giving a few, large gifts, you could give several smaller ones. You would also have longer to make use of any gifting allowances.
Deciding what to do with your property
If you own your own home, it can easily swallow up your estate’s full nil-rate allowance, even with the family home allowance. This means it’s hugely beneficial to think as far ahead as you can. What’s more, the further in advance you move, the greater the likelihood that you will be able to protect your assets from care-home fees.
Downsizing is one obvious option. It can, however, be a divisive one. Some people jump at the chance to live in smaller homes that require less cleaning and maintenance. Others prefer to stay where they are and age in place for as long as possible.
If you do not wish to go down either of these routes, then there are other options available. For example, you could sell the home to a family member. You could also potentially gift them a share in it or put it in a trust. These options are, however, often a lot more complex.
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HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
Estate Planning and Trusts are not regulated by the Financial Conduct Authority.