The UK imposes one of the highest inheritance tax burdens in the world, and this is a tax that continues to impact UK nationals even if they have been living abroad for a while. Now the Conservative Party has promised to raise the threshold if it wins the May general election.
This was not particularly a surprise. Prime Minister David Cameron has indicated a few times that he would like to increase the threshold so that only the rich pay the tax. Last October a nil rate band of £1m was suggested, though Mr Cameron admitted he would have his work cut out.
Now it has been included as one of the Conservative Party’s election pledges. Although the figure of £1m is prominent, the threshold will not actually be raised to this amount, it will depend on circumstances.
Currently, everyone gets an individual nil rate band of £325,000, which can be transferred to a surviving spouse or civil partner. So if none of the allowance is used on the first death, the surviving spouse now has an allowance of £650,000.
Tax is then payable at 40% on the value of the estate in excess of the threshold.
Under the Conservative’s proposals, individuals will be given a further £175,000 nil rate band, for use on the family home only, and this is also transferable.
This therefore makes a potential total nil rate band of £1m for a couple. For a single person it would be £500,000.
This would only be available if the house is inherited by direct descendants. This includes stepchildren and adopted children but not other close family members.
It would also be capped. The £175,000 band will only apply to properties worth up to £2m. It will then gradually be reduced, so properties worth £2.35m do not benefit at all.
This would start in April 2017, though the full amount would be transferable even if one spouse died before the policy came into effect.
The government is not in a position to lose tax revenue, so this would be paid for by imposing higher taxes on pension savings. The Conservatives propose restricting pension relief from £40,000 to £10,000 for those people who earn over £150,000.
If this inheritance tax policy goes ahead, it is expected to benefit 22,000 families by 2020, most involving London property.
The Institute for Fiscal Studies was quick to criticise the proposal, saying that it would “go disproportionately to those towards the top of the income distribution”.
It quoted a leaked Treasury document which said that there were no strong economic arguments for an inheritance tax exemption specifically for main residences. It could encourage investment in owner-occupied housing instead of more productive investments, discourage people from downsizing later in life and make the inheritance tax system even more complicated.
It would be much simpler to just raise the general threshold from £325,000.
Others though have cautiously welcomed the move, particularly since house prices have risen over recent years, dragging more families into the inheritance tax net.
According to HM Revenue & Customs, around £3.4bn was paid in inheritance tax in the 2013/14 tax year, divided among 15,976 estates. Residential property made up around a third of the total value.
The Office for Budget Responsibility had also predicted that the number of estates paying inheritance tax would double by 2018-19 if the threshold remained frozen.
Will this go ahead? For a start the Conservatives probably need to win a majority to have any hope of getting this through.
Also, we have had similar promises before. Prime Minister John Major proposed abolishing inheritance tax completely at the 1991 Conservative Party conference, though no action was taken. In 1996 Chancellor Kenneth Clarke said that “this government is committed to reducing and abolishing capital gains tax and inheritance tax”. This clearly has not happened, though he did at least raise the threshold.
Then in 2007 George Osborne, then the shadow Chancellor, pledged to raise the threshold to £1 million if the Conservatives won the next election. They were unable to implement the measure when their coalition partners, the Liberal Democrats, overruled it.
All this affects British expatriates too, since inheritance tax is based on domicile rather than residence and follows you wherever you live in the world. However it is often considered a voluntary tax since there are steps you can usually take to reduce or avoid this tax for your family and heirs. This applies to Portugal’s stamp duty, if that affects you, as well as UK inheritance tax. However, they are complicated taxes, especially when involving more than one country.
Seek expert advice for the best solution for your family.
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. | www.blevinsfranks.com
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