The Myths Surrounding Inheritance Tax

Whatever you think of inheritance tax (necessary for social welfare or an unfair burden on money that has been honestly earned), there are some interesting myths that abound about inheritance tax.

Here we explore and, in some cases, explode those myths. Read on to find out more…

Inheritance Tax only affects the very rich.

According to figures from Prudential, inheritance tax mainly affects the middle classes and particularly those living in the property hotspots of London and south-east England. This group accounts for half of the inheritance tax intake, with an average bill of £166,000 thanks to a combination of rising house prices and an inheritance tax nil-rate band that has been frozen at £325,000 since 2009/2010.

In 2009, the average London property cost £302,411, which was just below the IHT threshold.

These days, it is almost £150,000 above at £474,544, as data from the Land Registry data shows.

The very rich are able to protect their assets through measures such as setting up trusts or buying assets which qualify for business property relief.

You will be able to pass on £1m free of tax

The chancellor George Osborne recently announced the increase in the inheritance tax allowance to £1 million. However, the new limit will take several years to come into effect and even then, many families will not feel the benefit. The new transferable allowance worth £175,000 is for parents who leave their main home to their children and grandchildren.

What this does is effectively lift the IHT nil-rate band from £325,000 to £500,000 per parent, or £1m for married couples and civil partners, but it will not increase for people who are supporting nephews or nieces, the children of friends and so on.

The additional nil-rate band will be worth £100,000 when it is introduced in the 2017-2018 tax year. It will then increase by £25,000 over each of the subsequent three years until it finally reaches £175,000 in 2020-21. From then it will rise in line with inflation.

But the additional allowance will only apply to family homes – it won’t cover other assets, such as buy-to-let properties and second homes – and it will gradually be withdrawn for estates worth more than £2 million.

Inheritance tax raises lots of money for the government

It is fairly easy to avoid inheritance tax with careful planning. In the 2014-2015 tax year, inheritance tax raised £3.7 billion – just over 0.7 percent of the £513.5 billion total collected by HM Revenue & Custom. (In comparison – VAT raised £111 billion.)

Whatever you think of inheritance tax, it is important that you make a will and discuss your estate with qualified will writers or inheritance tax specialists. This is the only way you can exercise control over who gets what and how much – an especially important consideration for unmarried couples who have children.

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