General election time tends to cause a spike in views being expressed on IHT and houses. By a combination of lack of awareness, the complex tax system, and sometimes political intent, common errors arise.
Some examples from the December 2019 (now with some 2022 updates) election campaign are:
- Not realising that only around 5% of death estates suffer IHT each year – see https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/832126/IHT_Commentary.pdf
- Not being aware that the residence nil rate band can increase the normal £325k nil rate band by £150k* (now £175k) – see https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band
- Thinking IHT is double tax, rather than often being partly or mainly the result of otherwise tax free growth (or not much worse “double tax” than VAT)
- Hoping that giving away all or part of the house saves IHT – in many cases it makes things worse, due to reservation of benefit, pre-owned asset tax and loss of capital gains tax free uplift
- Forgetting the instalment option – see https://www.gov.uk/paying-inheritance-tax/yearly-instalments
- Worrying, when young and healthy enough that life cover can cheaply cover the IHT risk
- Forgetting the transferable nil rate band – see https://www.gov.uk/guidance/inheritance-tax-transfer-of-threshold
- Focusing on “40%”, rather than what actual blended tax rate might apply – eg the estate of a married couple (or widow/widower) with £1.2m house might suffer 8.3% (now 8%) IHT on that asset
- Not realising that a reduction in the IHT rate, or its abolishment, might be balanced by the removal of the tax free uplift on death or private residence relief (given much wealth is otherwise untaxed property gain)
- In hoping for IHT to be replaced with something else, that an annual wealth tax might cause more hardship than IHT on an elderly low income and valuable house owning taxpayer
- Worrying about IHT but not taking advice
If any others are spotted, I am happy to add to the above list.
- Even if IHT is payable on the house, there may be other resources to draw upon, such as the deceased’s pension fund
- In some circumstances, where more than one generation live in the family home, it is possible to gift and share part of the property with the younger generation without it being a reservation of benefit – see https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14360
*it is this residence nil rate band that Labour’s 2019 manifesto suggests should be removed, leaving just £325k (but not £125k as some suggest, which is from an earlier report commissioned, but not written, by Labour).