How to avoid being stung by inheritance tax
By Maplebrook Wills
15th Oct '18
Rises in tax
Last year, 5,400 estates were investigated by HMRC for underpayment of inheritance tax – a rise of 5% on the previous year.
The figures, published by chartered accountant UHY Hacker Young, show that inheritance tax is increasingly seen as a lucrative source of government income because it’s based on the size of your estate, which includes property.
Inheritance tax is levied – at a rate of 40% – when the estate is worth more the threshold figure. That figure is £900,000 if the estate is passed on to children and grandchildren.
With property prices having shot up in recent years, it’s not surprising that 24,500 estates were liable for IHT last year, also up 5% on the year before.
Inheritance tax investigations are stepping up
With HMRC clearly stepping up its investigations into under-payment of IHT, it’s important not to undervalue your home.
Says Mark Giddens, partner at UHY Hacker Young: “HMRC knows that there is a temptation to under-value residential property to save on IHT, as it is typically the largest figure on the return. The rise in investigations means more beneficiaries and estates, who may not necessarily be cash-rich, could be hit with hefty fines.”
The £900,000 threshold figure for a married couple is worked out by combining their individual allowances of £450,000 each – made up of the £325,000 ‘nil-rate band’ plus £125,000 ‘main residence band’ for the property. If one of the couple dies, the other inherits both the estate and the allowance without having to pay inheritance tax.
If there are no children to inherit the property, the estate isn’t subject to inheritance tax if everything is left to a beneficiary that’s exempt, such as a charity.
Some good news
There is some good news on the horizon because the allowance is set to increase. For the 2019-2020 tax year, the main residence band per person will go up to £150,000. They will then increase further, to £175,000, in 2020-2021. That’s a combined £1m per married couple.
The problem is that by the time your will does come into effect – hopefully a long time from now – the value of your home may push you over the IHT threshold.
Fortunately, there’s an easy way to avoid this. Simply place your property in a trust written into your will and it will no longer be eligible for IHT.
A trust is surprisingly simple. It’s just a legal entity that owns your house instead of you. And the actions of the trust are decided by the trustees, whom you appoint to the role. They’re commonly family members or close friends.