The rise in UK property values means that an increasing number of people have assets worth over £325,000 (or £650,000 for a couple), which means inheritance tax will be payable on their estate at a rate of 40%. The tax threshold will rise progressively to £1 million for married people between 2017 and 2020, provided they own a house.
At the 2015 tax rates, with an estate of £500,000, a single person would face a tax bill of £70,000. For a married couple with assets of £1 million the tax bill would be £140,000.
Many business assets and farmland are exempt from the tax. But residential property is taxable, and ‘reservation of benefit’ rules mean it is virtually impossible to give away property and still live in it and have control over it.
While it is possible to escape the tax by giving money away and then living for seven years after the gift is made, most people cannot afford to do this because they do not know how much capital they may need in later life, for example to pay for care home fees. So, in many cases, by the time people are ready to give capital away they are unlikely to live for seven years and tax will therefore be payable.
However, the new ‘pension freedom’ rules effective from April 2015 make it possible to pass on capital via a pension fund without any tax, and Enterprise Investment Schemes count as business assets which are exempt from the tax. So there are opportunities to mitigate or minimise tax by timely planning.
We work closely with several legal firms on tax mitigation planning.
The Financial Conduct Authority does not regulate tax advice.