Inheritance tax: Financial advisor provides advice
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In response to the pandemic, the Treasury is reportedly looking to hike its tax intake in this Autumn Budget with Inheritance Tax (IHT) likely to be a target. Experts believe Mr Sunak will implement reforms which will raise additional tax, without increasing the 40 percent rate of IHT which is paid on estates over £325,000. The Office of Tax Simplification (OTS) published proposals to reform Inheritance Tax two years ago, which offer insight into the course of action the Chancellor could possibly take.
These include implementing a combined annual allowance for all lifetime gifts of around £11,000 per individual to simplify the administration of the deceased’s estate.
One of the more controversial proposals is the abolition of the “gifts from surplus income “ exemption which benefits many wealthier families.
In its current form, IHT rules allow money from surplus income to be exempt from tax obligations so it can be shared to the deceased loved one’s upon their death.
Furthermore, the OTS recommended that, when lifetime gifts are added back to an estate, the exempt £325,000 should be shared proportionately amongst all the beneficiaries. In its current form, the first recipients pay no tax in the amount they receive from lifetime gifts.
As part of his Budget announcement in the early days of the pandemic, Mr Sunak expanded the freeze on the Inheritance Tax threshold until 2026.
Kay Ingram, a Chartered Financial Planner at Ingram’s Insights, explained what the rules look like ahead of the Budget.
Ms Ingram said: “This nil rate band hasn’t increased since 2009. By 2019/20 this allowance should have been £423,000 just to keep pace with inflation.
“It’s now frozen until 2026, so will gradually lose more value in real terms and bring more estates into the scope of IHT.
“Homeowners, who leave their home to a direct descendant, child or grandchild, may also pay no tax on an additional £175,000, giving a total allowance of £500,000 which can be passed on tax free before paying 40 percent on the balance.
“This residence nil rate band is reduced for estates over £2million, so that estates of £2,350,000 get no additional allowance. Those without children or grandchildren cannot use this allowance.”
Due to IHT being a tax paid upon someone’s death, it cannot be avoided easily in comparison to other tax levies.
Also, experts believe changing Inheritance Tax rules could be politically popular for the Government as it could be perceived as taxing those who are more wealthy.
Currently, IHT is not paid by taxpayers if the value of their estate is below the £325,000 threshold or if they leave everything above this specific amount to either their spouse, civil partner or a charity.
Speaking to Express.co.uk, Steve Webb, the former Pensions Minister and finance expert, shared his thoughts on how an Inheritance Tax might look if implemented by Mr Sunak.
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