Latest IHT receipts provide another reminder of the need for planning

IHT receipts for April to October 2020 were £33 million higher than for the same period last year, and IHT receipts for October 2020 were up 17% compared to October 2019.

The latest HMRC statistics for tax receipts show inheritance tax (IHT) receipts for October 2020, at £570 million were 17% higher than October last year’s £489 million.

HMRC believes that the higher receipts in recent months is expected to be due to the higher volume of wealth transfers that took place during the early months of the COVID-19 pandemic but says it cannot verify this until full administrative data becomes available.

However, IHT receipts for April to October 2020 (£3,003 million) were only 1% (£33 million) higher than for the same period last year (£2,970 million), partly as HMRC hasn’t been accepting cheques for payment of IHT due to COVID-19. This has caused a temporary delay in HMRC receiving IHT payments.

According to HMRC, this has now been resolved, and it expects this effect to unwind over the remainder of the year. However, at the time of writing, HMRC is still not accepting cheques for payment of IHT.

IHT planning

Before considering any steps to mitigate IHT, it’s important for clients to consider some fundamental questions, such as:

  • What should any surviving spouse or civil partner inherit? Often the simple answer is ‘everything’, leaving many decisions about wealth distribution to other potential beneficiaries until second death.
  • Who are the other intended beneficiaries?
  • Are there specific items – from jewellery to shares in a family business – that the client wants to leave to particular individuals?
  • What framework – if any – is needed for their bequests? They might be happy to leave capital outright to a 40-year old architect daughter, but the same may not be true of a 19-year old student son.

Answers to these questions will help a client to shape their will, and provide them with a structure for their IHT planning. It may also prompt a client to consider whether making some lifetime gifts is a sensible option.

Certain gifts made during lifetime will be altogether exempt from IHT and so will fall out of a client’s estate for IHT purposes as soon as they are made, such as the:

  • Annual exemption: gifts of up to a total of £3,000 each tax year. To the extent that this exemption wasn’t used in the last tax year it can be carried forward and used in the current tax year, but only once the current year’s exemption has been used.
  • Small gifts exemption: gifts of up to £250 to as many people as desired. However, the exemption does not apply to gifts made by any person who has, in that tax year, made total gifts of over £250 to that donee.
  • Normal expenditure gifts exemption: regular gifts out of surplus income that do not reduce the donor’s standard of living.

And other lifetime gifts, particularly if made outright, will in most instances attract no IHT when they are made and IHT will be avoided altogether if the donor survives for the following seven years.

Transfers during lifetime or on death between spouses/registered civil partners are generally exempt without limit. And each person is allowed to leave up to £325,000 (taking account of any such transfers made in the immediately preceding seven years) to anyone other than their spouse/civil partner free of IHT (taxed at a nil rate). To the extent any of the £325,000 nil rate band is not used on death it can be "inherited" by (i.e. transferred to) a surviving spouse/registered civil partner, and, subject to a claim made within two years, used on the death of that surviving spouse/registered civil partner.

The same is largely true (but with important limitations on who can inherit, and how, within this allowance) of the residence nil rate band of £175,000.

Trusts can, of course, provide a way of controlling gifts by interposing a third party, the trustees, between the settlor and their beneficiaries to deal with the gifted property in accordance with the terms of the trust that the client creates. Trusts can be as rigid or as flexible as the client would like and can offer a range of tax and non-tax benefits.

The payment of regular contributions to a life insurance policy held in trust for those who will inherit the donor’s estate on death would normally qualify as being exempt. The sum assured under such a policy would not usually be treated as part of the donor’s taxable estate and would be payable free of IHT to the beneficiaries who could then use the money to pay the IHT arising on the death of the life or lives assured.

An IHT/estate planning review could be worthwhile to ascertain what, if any, planning and provision may be possible.

This is especially so because the £325,000 nil rate band will remain frozen until the end of 2020/21 and thereafter increase by CPI.

Careful consideration should also be given to the residence nil rate band and its use in planning and the fact that it is reduced by £1 for every £2 where the deceased’s estate exceeds £2 million.

The future of IHT?

Earlier this month, the Resolution Foundation published a paper examining how to repair public finances, in which it suggested a freeze in the IHT nil rate band and bringing inherited pensions within the ambit of the tax (and applying income tax on death benefits where death occurs before age 75). On business and agricultural reliefs, it suggested applying an overall cap of £2.5 million.

In October, the Centre for Policy Studies suggested abolishing IHT totally and instead replacing the capital gains tax exemption on death with holdover relief. As an alternative, it suggested raising the nil rate band to £1 million per person and scrapping the residence nil rate band.

And of course, it has been more than a year since the Office Of Tax Simplification put forward its suggestions to Government on the reform of IHT.

For more details about inheritance tax, read 'what is inheritance tax?'.

If you or a client would like to discuss IHT planning, why not get in touch and speak to one of our advisers.

Alternatively, download a copy of our inheritance tax guide, Securing your wealth for future generations.

The information in this article is correct as of 16/12/2020.

The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts.