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More families than ever caught in inheritance tax net

The government’s record inheritance tax haul reveals how more and more British families are being caught out – and you do not even need to be a UK resident to be affected.

Last year British taxpayers – including expatriates – paid a record sum in inheritance tax. Totalling £4.7 billion over the 2015-16 tax year, this boosted government coffers by 22% more than the year before.

Such a notable increase would make more sense if the rules of inheritance tax liability had changed to widen the net. This is not the case, however, as the £325,000 threshold (£650,000 for couples) and 40% rate have stayed the same since 2009.

Why the sharp increase in revenue?

This increase is not necessarily a result of people being wealthier and leaving more money behind, or even a higher death rate. Instead, it has much to do with the increasing value of assets – especially property. As house prices have risen, so has the number of estates that fall within the £325,000/£650,000 threshold, along with the amount they have to pay.

This helps explain why these latest revenue figures are a huge 91% increase on those from 2009-10, even with the same threshold. Back then in recession-hit Britain, vastly lower property values saw the Treasury receive a low of £2.4 billion in inheritance taxes, with only one in 10 properties selling over £325,000. Fast forward to 2015 and one in four houses breached that threshold. Now, with property prices again soaring, more and more British families are being caught in the inheritance tax net.

On top of that, by staying static over the years, the liability threshold has not kept pace with inflation in the same way that the value of property or other assets has. By the time the threshold is earmarked to change in 2019, it will need to increase by around £66,000 to catch up with average inflation.

With a relatively high rate charged on anything over a relatively low threshold, it is easy to see how more people have been caught out by inheritance tax to give the Treasury this record boost.

New allowances may offer scant relief

From 2017, the government plans to start phasing in inheritance tax relief for your main home. It will begin with an additional £100,000 allowance in April and peak at £175,000 in 2020. This means that, in five years’ time, couples can potentially pass on up to £1 million-worth of property tax-free.

While this sounds promising, it is likely that the benefits of the proposed changes will be dampened by the continuing trend for rising house prices. The Royal Institution of Chartered Surveyors estimates that property values could increase by up to 25% over that time.

The proposed rules for the new allowances are also far from straightforward. Although not yet finalised, they are likely to include complicated conditions that may further limit the benefits. For example, the full tax-free allowance looks set to only apply to a main residential home that is worth less than £2 million and is passed on to direct descendants. Properties worth more than this will be subject to a tapering system that will whittle the allowance down to nothing when a home exceeds £2.7 million.

With such a complicated and limiting structure, the new relief system has been labelled overly complex and unfair by many commentators. It is, therefore, unlikely to reverse the trend for ever-increasing inheritance tax revenue in the years to come.

Expatriates can be caught out too

Even if you have lived in Portugal for many years, you may not realise that as a UK national you can still be in the firing line for inheritance tax. That is because it is where you are domiciled that determines your liability, not where you are resident.

Domicile law is extremely complex and there are various ways your domicile status can be tested for inheritance tax purposes. To get it right, you should seek professional guidance that takes into account your individual circumstances and objectives.

As an expatriate, it is even possible to be liable for inheritance taxes in two countries. An adviser with specialist expertise can help you establish your domicile status and how UK inheritance tax interacts with Portuguese stamp duty.

They can also help you take advantage of all the reliefs available to minimise its impact. With professional advice you can put plans in place to make sure your legacy is distributed as you wish without your heirs paying more tax than necessary.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices, which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.

By Gavin Scott
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Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. |

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