At the Conservative party conference in 2007 the current Chancellor of the Exchequer, George Osborne, stood up and promised that anyone fortunate enough to have an estate valued at up to £1 million would not have to pay Inheritance Tax; this week any hopes that he would deliver on this promise were dashed.
How does Inheritance Tax work?
At its most basic level Inheritance Tax (IHT) is pretty simple, anyone who dies with an estate worth over the nil rate band, currently £325,000, will pay tax at a rate of 40%; for a couple the band is doubled to £650,000.
With property prices rising significantly over the past couple of decades more and more estates are being caught by IHT, which is effectively a ‘double tax’, as the assets have generally been built up with income which has already been subject to tax.
So when George Osborne promised that he would raise the IHT nil rate band to £1 million there was much rejoicing, however that promise has now fallen by the wayside, so much so that by 2019 the IHT nil rate band will still be £325,000, the same as it is currently.
But it gets worse.
Even as late as November 2012, during his Autumn Statement, the Chancellor said that he would increase the nil rate band in the 2015/16 tax year; albeit only by 1%, well below the current rate of inflation.
However, fast forward less than two months and he has changed his mind.
The government has now said that it will freeze the nil rate band at current levels until 2019 at the earliest. Whilst the money raised from this latest U turn will be put to a very worthwhile cause, helping reduce the cost of long term care, it represents another blow to those people hoping to leave as much of their wealth as possible to their dependents.
Furthermore, with inflation predicted to rise during 2013 and uncertainty over the effect of Quantitative Easing on the long term inflation rate, the value of the nil rate band will be eroded increasingly quickly.
What can be done?
Whilst a number of ‘loopholes’ have been closed there are still a number of ways that Inheritance Tax can be avoided.
They key is to know the rules and also to take advice; of course this will cost you, but should save you many times over whatever you pay in fees.
People wanting to avoid Inheritance Tax should start by making a Will and then using their annual allowances i.e. gifts which are immediately outside of the estate for Inheritance Tax purposes. In addition they should then arrange their investments in such a way which they will avoid Inheritance Tax and also consider life insurance, which can be used to pay the tax bill.
Once upon a time Inheritance Tax was seen as a voluntary tax, these days it is far from this, however with a little careful planning and some good advice it can be avoided, resulting in more of your estate being left to your loved ones to enjoy in years to come.
Phillip Bray writes for online financial information provider, Investment Sense, who write blogs, technical guides and highlight the best buy savings accounts on their website.