The UK’s inheritance tax haul continues to set new records as it rakes in £6 billion for 2021. This 19% rise translates to almost £1 billion more taxes collected in a single year. But if IHT was only intended to affect the ‘super wealthy’, why does the revenue it generates for the government continue to skyrocket?
UK inheritance tax (IHT) is payable on the worldwide estate of a UK domiciled person who has passed away, as well as on gifts made by UK domiciled individuals within the seven years prior to death. UK assets are always liable to inheritance tax, regardless of the domicile of the owner. This year, IHT will affect around 33% more families, breaking all previous records.
Passing wealth and assets to loved ones can be a minefield from a tax perspective, so independent expert advice is always an advisable avenue to explore.
Why has the collected inheritance tax breached £6 billion?
The increase of almost a billion pounds of inheritance tax collected by HMRC over a 12-month period is due to a few factors, the most unfortunate of which is the recent pandemic. The sad increase in the number of annual deaths meant that more estates than usual were assessed for inheritance tax.
This period has also seen record highs on property prices, where the value of the average UK home has been increasing by £44 per day over the last six months alone. The surge has increased the value of estates already subject to inheritance tax, but also pushed others across the tax threshold.
Finally, Chancellor Rishi Sunak’s decision to freeze allowances on tax payable till 2026, despite rising inflation, will likely see more families being caught in the IHT net, as least for the next five years.
What are the allowances and exemptions of UK inheritance tax?
Inheritance tax is charged at a flat rate of 40%.
The main allowance, or ‘nil rate band’, before tax is payable on IHT is £325,000 per person. However, it is possible for spouses and civil partners to pass any of this unused allowance onto each other completely tax free. Since spouses/partners are exempt, if your estate planning is structured so that assets are passed to the surviving spouse on the first death, then onto children or other heirs on the second death, a couple could have a potential combined allowance of £650,000.
There is also a second allowance, often referred to as a Residents Nil-Rate Band (RNRB), which currently allows an additional £175,000 per person. Again, this could be combined with each spouse or civil partner to £350,000, but it is only applicable when bequeathing a main home directly to your children or grandchildren. A couple, therefore, could have a combined total allowance of up to £1 million.
Note, however, that the RNRB allowance reduces on a sliding scale if the property is valued above £2 million, and both allowances are frozen until 2026.
From an individual point of view, there is no tax to pay on an estate if any of the following criteria are met:
▪ The estate is under the value of £325,000 threshold, or under £500,000 including a main home left to descendants.
▪ You are leaving the estate to a spouse or civil partner
▪ You are leaving the estate to a registered charity
▪ You are leaving the estate to a community amateur sports club
When it comes to gifts, you can give up to £3,000 each tax year that will not be counted with your estate or included with any future inheritance tax assessments.
The domicile issue and expatriates
UK IHT is determined by domicile, not residence. You can live in Portugal and still be a UK domicile, making your worldwide estate liable. If you hold assets in the UK, these will be taxable regardless of your domicile status.
Also, whether you live in the UK or abroad, if one spouse is a UK domicile and the other is not, it is worth noting that the usual spousal exemption is limited where the non-UK domiciled individual inherits from the UK domicile. If this applied to you, take personalised, specialist advice.
If you are worried about how inheritance taxes (both UK IHT and stamp duty in Portugal) will affect your heirs, it is advisable to seek independent, expert advice.
Everyone’s circumstances are different, and estate planning is even more complicated for expatriates who have assets and heirs in different countries, so receiving guidance from a specialist with cross-border expertise will help you navigate all the complexities. This will afford greater peace of mind for you, and for your loved ones.
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; individuals should seek personalised advice.
By Adrian Hook
Adrian Hook is a Partner of Blevins Franks in Portugal and has been providing holistic financial planning advice to UK nationals in the Algarve since 2008. He holds the Diploma for Financial Advisers (DipFA) and is a member of the London Institute of Banking and Finance (LIBF).