It was recently revealed that the UK charges
the highest proportion of inheritance or estate tax compared to a many
other world economies, with the government taking three times as much of an
individual’s estate as the global average. So we’re here to debug some of the
myths and mysteries surrounding inheritance tax.
What is Inheritance Tax?
“Inheritance Tax is usually paid on an estate
when somebody dies. It's also sometimes payable on trusts or gifts made during
someone's lifetime. Most estates don't have to pay Inheritance Tax because
they're valued at less than the threshold (£325,000 in 2014 to 15). The tax is
payable at 40% on the amount over this threshold or 36% if the estate qualifies
for a reduced rate as a result of a charitable donation.” – Source: HRMC
The Inheritance Tax
threshold (or 'nil rate band') is the amount up to which an estate will have no
Inheritance Tax to pay. If the estate - including any assets held in trust and
gifts made within seven years of death - is more than the threshold,
Inheritance Tax will be due at 40 per cent on the amount over the nil rate
band. From 6 April 2012 people who leave 10 per cent or more of their net
estate to charity can choose to pay a reduced rate of Inheritance Tax of 36 per
cent. You can find out more about the thresholds here.
Inheritance Tax Comparisons
Recent research
revealed that the average UK tax take from inheritance
tax (IHT) is 25.8% from an individual’s estate, compared with the world average
of 7.67%.
This tax is charged at a flat rate of 40%
in the UK, unlike countries such as France where inheritance tax can be levied
at 60%. Another difference is that whereas in the UK the estate as a whole is
taxed, in France each beneficiary is taxed on the share which they
receive. As such, the French system is a true inheritance tax (the heir
is taxed) whereas the UK system is an estate tax (the estate pays).
So whereas in the UK there is a nil-rate
band for the estate (of £325,000 until 2014/2015) and then everything over this
is taxed at 40%, in France the nil-rate (or tax free allowances) and the rate
of taxation vary depending on the relationship between the deceased and the
beneficiary. The tax free allowances are revised annually in France for
each calendar year; those below are for 2012. The nil-rate band is set in
advance for future tax years in the UK.
Some countries do not even have inheritance tax.
In a 2014 survey, AGN Europe found that Austria,
Cyprus, Estonia, Isle of Man, Liechtenstein, Slovakia and Sweden do not have
inheritance tax; The Czech Republic has no formal gift or inheritance tax but
does have a form of these taxes incorporated into their income tax regime.
The Impact of Inheritance Tax
The high tax bill associated with IHT can be
extremely off putting to people looking to create wealth to pass on to their
relatives. Some have argued that it was
important for individuals to consider tax planning for the long term as early
as possible, for example by making use of the seven-year rule for making gifts
of assets.
Simon Browning,
tax partner at UHY Hacker Young in Nottingham, said: ‘Previously, making
pension contributions has always been tax efficient but the inflexible nature
of the drawdown of pension funds has generally put people off pensions. This
will no longer be the case, if the proposed changes come into force as planned
in 2015. People will be able to draw down funds much more freely and with
increased flexibility, which will be hugely beneficial in terms of tax
planning,’
What are your
thoughts on the Inheritance Tax system? We’d like to hear your views on the
subject. If you require any help with tax systems, you can get in touch with us
at Finnies at enquires@finnies.org.uk or 01482 861919; we’d be very happy to
help.
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