Inheritance tax, also known as IHT, is payable on an entire estate upon the death of an individual, except when:
1. The value of the estate is below the threshold of £325,000; or
2. You leave your entire estate over the threshold to your spouse, civil partner, a charity or a community amateur sports club.
If you decide to give away your home after death to either your children or your grandchildren, it is possible for the tax threshold to be increased to £500,000. The standard rate of IHT is 40% and it is only charged on the part of the estate that is over the relevant threshold. As with the majority of taxes that have to be paid there are a number of tax reliefs and exemptions available and that may apply to a variety of circumstances. This includes the possibility to have business relief applied to some assets which means they can be passed on free from inheritance tax or with a reduced amount of tax payable.
With the collection of IHT now being an established part of the administration process following a person's death, it has been recorded that the amount of IHT collected by HMRC over recent years has increased. The most recent figures that have been published show an increase of £0.4billion compared to the previous year. 1 In addition to this there has also been a reported increase in the number of estates where huge sums are being received by way of inheritance due to the overall size of the estates being so much higher than they have been historically.
It is believed that this increase in the value of estates, especially at the higher end, is what has driven the increase in the amount of IHT that has been paid to HMRC. An additional factor is the increase in the overall value of houses – as the market has continued to increase the value of houses until only recently when the market has started to begin to slow. There has also been an increase in the value of other assets alongside property which has resulted in the general value of assets being increased across the board.
With the increase in revenue being received from the collection of IHT, the Government have started to review the IHT regime. The proposed changes to the IHT rules and the current thresholds were circulated towards the end of last year. The possible proposals to amend the IHT rules included a reduction in the percentage of IHT that would be payable on an estate that was valued over the threshold. As far as we are aware, the threshold would remain the same and the application of the IHT would still only apply to the part of the estate that is over and above the threshold. It was thought that any possible changes by the current Government would be referred to in the budget in March 2024 2 and that such changes would be as previously alluded to by the Prime Minister. The budget, however, seemingly remained silent on any changes to IHT. With the increases in IHT being received by HMRC it seems unlikely that a Government, either current or future, in the middle of a cost of living crisis will reduce any form of long standing tax that is payable by a seemingly ever increasing number of estates.
Should the proposed changes to the percentage of IHT be implemented in the future, one advantage of a reduction in the payment of IHT is that it may allow more claims relating to disputes over estates to be settled as the burden of the IHT liability will no longer be a blocker to settlement (or as much of a blocker as it might have been previously). It can sometimes be the case that whilst parties can agree to the transfer of the estate assets to another party to the dispute, the IHT is still due and payable by the estate. If the beneficiary or third party receiving the asset(s) as part of the settlement is unable, or in some cases, unwilling to settle the IHT liability relating to the asset(s) they receive, the liability automatically falls back on to the estate and ultimately, the executors. This is a burden on the executors that they may not be able to meet if there are not enough funds left within the estate. The executors could ultimately find themselves personally liable for the IHT. The IHT liability does not simply go away once the asset has been gifted. This, therefore, could make the dispute almost impossible to resolve by way of settlement or any form of alternative dispute resolution as well as subjecting the executor to substantial cost exposure.
With any proposed changes being made to the IHT regime there will inevitably be individuals that benefit and others that will not benefit. If the percentage of IHT decreases, it would mean that there will be a number of estates being administered that will become liable to pay less IHT compared to the current percentage of IHT payable. This will make it easier for the executors to administer the estate and it will inevitably place a smaller financial burden upon the estate and ultimately the executors, compared to the current percentage of IHT that is applicable. Should the amount of IHT payable increase, it may be possible that more estates could fall into disputes as those administering them may find it difficult to realise the estate assets to pay the IHT required.
At this time it is still unclear what changes could be made to IHT, when those changes could be made or if the current government will make any changes at all, especially now the budget has been announced with no adjustments to IHT published. From the perspective of the government, it is becoming an increasingly profitable tax with the amount of IHT recently paid increasing year upon year. Until any changes are formally made, and fully introduced, the payment of IHT will need to continue to be factored into the administration of all estates by all executors and personal representatives following a person's death. It will also be essential for IHT to remain at the forefront of any discussions when estates are not only being administered, but also during disputes and the gifting of large assets.
Authors:
- Helen Briant (Partner)
- Elizabeth Mulley (Managing Associate)
- Hannah Jakeman (Associate), Commercial Litigation and Dispute Resolution
Originally published by ThoughtLeaders4
1IHT receipts £0.4 billion higher than same period previous year - Today’s Wills and Probate (todayswillsandprobate.co.uk)
2Rishi Sunak considering inheritance tax cut, report says | Inheritance tax | The Guardian
