Cutting the ‘death tax’ may at first glance seem like a winner, however, looking more closely at the proposal, there may be more than meets the eye.
As the tax man continues to rake in billions each year from the dreaded tax it calls into question who is paying this as 90 percent of the UK’s population do not have properties over the £325,000 threshold.
Laura Ripley, Chartered Financial Planner at BRI Wealth Management explained the two categories of people who are left to pay.
Silent generation and baby boomers
These two demographics often live off state pensions or small incomes and frugally spend, but they can get caught in the net because of one asset bearing the brunt of significant asset inflation: their home.
Those with very large estates
This roughly equals seven percent of the UK’s population and includes individuals with very large estates which exceed the IHT threshold.
Various financial planning techniques help them limit their liabilities, significantly reducing the impact of the tax on their finances.
Ms Ripley added: “The UK’s IHT is one of the highest taxes in the world and is long overdue for reform/revision.
“The silent generation and baby boomers should not have to shoulder the burden alone simply because of the overinflated value of their home.”
Senior Conservatives are said to be discussing abolishing inheritance tax in a bid to win over voters ahead of the next election.
The change could cost the treasury £7billion a year.
Inheritance tax is only paid on estates that reach the thresholds. According to the HMRC, that’s only one in 20 estates.
The Treasury said more than 93 percent of estates are forecast to have zero inheritance tax liability in the coming years.
The UK without IHT
She said: “If IHT gets scrapped, we might see tax benefits, allowances and/or exemptions squeezed further elsewhere as a result. For years, there have been talks of a reform on the income tax relief given on pension contributions.
“One possibility could be that this is moved to a flat rate of 25 percent meaning the highest earners no longer secure 45 percent relief on pension contributions but the basic rate payers get an increase from 20 percent to 25 percent.
“We’ve seen huge changes in pensions over recent years and the latest in relation to the abolished Lifetime Allowance (LTA) could also be the start of the end of multi-generational tax efficiency for pensions.
“Currently, pensions are one of the most tax-efficient vehicles to transfer wealth to future generations. Historically, this has been taxed using the LTA threshold. As this is being removed, it is unclear, how long the multi-generational tax benefits of pensions will be available.”
The likely winners from the scrap
The change which would be considered a manifesto pledge rather than a policy would benefit wealthier individuals and the State.
Ms Ripley explained the wealthy see their tax burden reduced and the State would presumably maintain high tax rates for living.
The scrapping of IHT could also result in an economic slowdown with the elderly choosing to reduce expenditure and keep hold of their funds, knowing that these would be passed on to their beneficiaries upon their death, tax-free.
Before making any big financial decisions, Britons are encouraged to seek advice from a financial advisor.
Financial advisors at BRI Wealth Management explained that it is best to build a diverse asset base using multiple wrappers, which will provide the most flexibility in the face of change.
They stated: “As the debate over scrapping IHT rages on, it’s crucial to fully embrace all of the possible consequences this might have on individuals, regardless of their wealth.
“Rewriting the rules of wealth inheritance is a major undertaking which demands careful planning and thoughtful consideration.”
