The treasury has a problem: how can it find additional finances to cover its promises, such as increased NHS funding, without raising taxes? The question still lacks a clear answer, but it seems no longer to be a question of whether taxes will be increased - irrespective of which party is in power - but which taxes will be raised and by how much?
Today’s treatment of lifetime gifts is extremely generous, making Inheritance Tax, or ‘IHT’, a potential target for the Chancellor in the coming autumn Budget. What could this mean for you?
One way of limiting what is seen as an often unnecessary tax, is making gifts. But it pays to cross the t’s and dot the t’s in doing so. If you are considering making gifts, make sure all your inheritance tax (IHT) liabilities are covered.
A point to consider when making lifetime gifts is how they may affect the remainder of your estate. Any gift could reduce your available nil rate band if you do not survive for the following seven years, so your remaining estate may suffer more tax than you might expect.
Hilary has an estate of £600,000 and all of her nil rate band available. She gives her niece Ann £300,000, and in her will leaves her residual estate to her nephew, Andrew. Four years later, Hilary dies:
- Ann has no other allowances to offset against the £300,000 gift, but is covered fully by Hilary’s nil rate band (which by 2022 is assumed to be £340,000).
- Andrew’s legacy has only the remaining £40,000 of nil rate band to offset against it. There is therefore an IHT bill of £104,000 on the rest of the estate, leaving Andrew with a net £196,000.
- A simple way to address this problem is to arrange a seven-year term assurance to cover the extra tax on early death. For lifetime gifts that come to more than the available nil rate band, special ‘inter vivos’ cover can be set up to match the sliding scale of tax liability.
Alternative Inheritance Taxes
The Resolution Foundation Intergenerational Commission has suggested introducing a ‘lifetime receipts tax’. This tax would replace IHT and would be payable on any gifts or inheritance that an individual receives in excess of a ‘lifetime receipts allowance’ of £125,000 (rising with inflation).
If you are contemplating pre-Budget gifts, make sure you ask us about your liabilities. If you want to cut your tax bill, the HMRC statistics suggest you should seek personal financial advice, not wait for the Chancellor!