The Budget is coming on March 3. We’ll probably see less drastic changes than we expected three months ago. We thought we were emerging from the second Covid wave, but then it got a whole lot worse. At least, the vandalism of our economy did.
Anything that stifles the economy even further feels less likely to happen now. It’s certain that we’re in for tax rises, but likely that they will be deferred. If you are cynically minded you might regard this as a way for the government to devalue the pound and use inflation to escape mounting debt.
Nevertheless, there’s something to be said about inheritance tax (IHT). This one tends to go under the radar of our clients. It’s not something people factor in when they are planning the management of their assets or the financial structure of their businesses.
But it should be. There has been speculation that because the UK is facing the prospect of an economic downturn on par with the end of World War Two, it’s possible that IHT will be raised to 80% again to tackle public debt, as it was then.
The government was already looking at changing IHT before the pandemic. Also, in its manifesto, it promised not to raise certain taxes, and IHT was not on the list. But whatever the government does or doesn’t do with it, inheritance tax is a needless drain on your legacy. It’s the only tax you pay because you weren’t ready for it.
This isn’t just a question of sorting your will out, which we also happen to be terrible at (the proportion of UK adults without one is at an all time high at more than half) — that does have a bearing on your inheritance tax position, but it’s far from the only planning opportunity.
The IHT rate is 40% above £325k, and to avoid this you have to plan for it in advance. To dodge it completely you need to transfer your assets seven years before your death (the rates taper during this time). Naturally this is not an exact science because people find it difficult to know when they are going to die. And it isn’t always as simple as it sounds, as moving assets can trigger other taxes, such as Capital Gains Tax.
But the implicit moral message from HMRC here, if there ever is a coherent one, is that you shouldn’t be allowed to contract a terminal disease and then decide to give your stuff away without being penalised. You must have decided to do it in advance, well before you approach the knacker’s yard.
You need to not have legal or beneficial ownership of assets in order for them to be entirely outside of your estate and, quite extraordinarily, if you think about it, this means that you will pay 0% IHT if you survive the seven year period after transferring title to your wealth.
It bears repeating: you only pay this tax if you haven’t planned for it. What that means socially and politically is an interesting question. Perhaps it means that those who have less access to financial advice are arbitrarily penalised, so it’s classist. Or that only those with significant wealth pay it, so it’s classist the other way.
Or, if IHT is indeed raised to 80%, perhaps it’s ageist, a way of getting old people to pay for Covid (all the money the government has spent, we are told, was to protect people, and the only ones dying in significant numbers are the elderly).
Again, a cynic might regard a hike in IHT as another play in a massive transfer of wealth that has been happening since the first lockdown. One in which swathes of independent businesses have been intentionally trashed and devalued by the government before being absorbed by corporations.
It’s hard to know, but whatever narrative you choose, you can do something about IHT in a way you can’t with any other tax: totally avoid it. Obviously, it’s never too early to plan for this. Unless, that is, they make everyone pay it. If that happens then we can expect an exodus by those who can afford to leave the UK. If not, you might want to do something about this tax because it’s relevant to every investment decision you make, even incorporating your business.
If you’d like to discuss your exposure, get in touch.