Inheritance tax changes

[AhBiscuits]

Any speculation on what changes will be made? Is anyone trying to put measures in place before the budget?

My dad died suddenly in August. His estate is not liable for inheritance tax as he left his home to me and my siblings, he had inherited my mum's nil rate band and it was under a million in value. I have made sure to get the probate application submitted this week though, because who knows?

My inlaws have just signed their second home over to DH and his brother and are now renting it from them. They expect to live much longer than another 7 years. They are hoping this will remove this property from being part of their estate. But again, who knows.

I don't agree with inheritance tax. People have worked hard for their money and were taxed on it. It should be theirs to use as they wish without another tax. It was really important to my dad, and it clearly is to my inlaws, that we inherited when he died. He lived frugally, despite our protestations, with this in mind.

You go through their bank statements. It's advisable to keep a record both sides.

Obviously the tax isn't affected by anyone's opinions, though people's opinions may help them decide who to vote for which can impact it.

My estate would be impacted by IHT, as I'm single with no kids, so "only" the £325k and house plus savings are more than that already (I'm 56). I am leaving most to my niece and nephew, some to my godson, sister, cousins daughter (might write in my other niece at some point). And I'm sure they will all be happy with their share of the £325k and 60% of anything over it.

Noone ever seems to mention how how unfair it is on a single person (my niece and nephew won't be inheriting from their parents either) not having the extra band for property.

@DogInATent But the top 1% do pay more! More at the two higher rates of tax! Also they pay nearly 30% of all income tax received by the government. We need this money and you cannot keep taking more and more without expecting some people to leave the uk. This makes everyone worse off and we need to get away from envy. If you are a high earner why does it matter if you are retired or working? You still pay income tax. Those who don’t earn much get income support. Tax never exactly multiplies in the way you say but it’s a progressive tax. What is wrong with that?

There's a taper relief on gifts over the 7 years, by year 6 you pay 8%, 3 to 4 years is 34% so it maybe less than you think.

As explained, the gifts were under £325k - therefore there is no taper - the total gift will use up IHT allowance for the full 7 years.

I used to think that. However the way the IHT forms work is that the total of any gifts made in the last 7 years are deducted from the £325k nil rate band before anything else happens. And then you pay 40% on the rest. So in practice this means that taper relief only comes into play once you have already given away £325k. Anything below this just uses up your nil rate band.

So let's say you have an estate of £1m and gave away £325k six years ago. That gift used up the entirety of your nil rate band and so you pay 40% IHT on the whole of the remaining £675k.

But if instead you had given away £500k six years ago, then the first £325k of the gift uses up the nil rate band, the remaining £175k of the gift gets 80% taper relief, and then you pay 40% on the remaining 500k of the estate.

It was quite a shock to us to realise that we'd effectively be paying 40% on a very large gift that was made well over 6 years ago.

To clarify, as it's too late to edit. The remaining £175k of the gift gets 80% taper relief on the amount of IHT that would otherwise be due. Which is an effective tax rate of 8%. I should have left it alone the first time I wrote it!

Gosh, really? This I did not know!

It’s here. Wow.

https://www.gov.uk/inheritance-tax/gifts

Taper relief only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold.

Obviously, it doesn't all go to the government. If the inheritance includes a property, the amount that a child or children of the deceased can inherit without paying inheritance tax is £500,000. Inheritance tax of 40% is paid on any amount above that threshold. Therefore, if the estate was worth £1 million, including a property, the beneficiaries would receive £800,000 to share between them. That's still a lot of money that the beneficiaries haven't earned themselves.

That's exactly it. And I think this isn't generally well understood. It was only a couple of years ago that I realised you need to survive full 7 years after giving any gifts below the nil rate band before you make any IHT savings at all.

The other thing that I have read online on a few solicitor/accountancy websites, but which I can't find anything about in the HMRC guidance (so can't confirm it's definitely correct), is that they deduct the oldest gifts from the nil rate band first. If true, that would mean that if you gave away £325k six years before you die, and another £325k two years before you die, your estate wouldn't get taper relief on any of it.

‘Taper relief only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold.’

Thanks for bringing this to my attention TriceratopsRocks. I had no idea that this is the case and I agree that this is probably misunderstood by a lot of people.

I am really pleased you told me, @TriceratopsRocks

After my dad died, my mum has been gifting me and DBro some money now and then because she doesn’t need all their joint money. Decent and very welcome, of course, but nowhere near £325k. We all thought these gifts would have taper relief if mum died in 4-5 years, say. So it is good to know for keeping records that it won’t.

The Assisted Dying bill is a free vote, although it has been proposed by a Labour MP though a ballot.

If you are so worried about the government getting any of your inherited money, you can absolutely spend all of it on yourself and the tax payer will pay for your care if you need it.

The threshold is already £500,000 if this includes a property.

@thepariscrimefiles My point is that the numbers are out-of-date for today’s COL, that’s all. I think it would be good if the government adjusted them to reflect 2024 prices.

That would involve selling your home and spending it all on yourself - not sure how anyone would manage that.

If you're earning the equivalent of 4 wages, surely it's logical you should pay around 4 times the tax

Hahahahahaha

If you earn £35k, your take home pay is £28,720. You pay £6280 tax and NI.

If you earn £140k, your take home pay is £85,986. You pay £54,014 tax and NI.

The higher earner earns 4 times the lower earner.
But their take home pay us only 3 times higher.
Because they pay 8.5 times the tax.

Our tax system is highly progressive and higher earners pay much, much more tax than lower earners - not only as a total but as a percentage of what they earn.

Unfortunately, some people listen to divisive, populist tropes which seek to demonise 'the rich' and don't bother actually verifying what reality is.

It's strange, because people usually read these things online, and it's so easy to do a quick Internet search to check whether something counterintuitive/which seems unfair is actually true.

There's got to be some psychology around people being primed to believe things which suggest they're being unfairly treated.

For example, you asked
But how much of all income do they earn?

if I Google "how much do the top 1% earn in total UK" the first result is an IFS article which tells you that the income the top 1% earn is 14% of national income.

But then I keep looking, and get this great graph which shows that the income the top 1% income peaked at 14% of total UK income in 2007, and is now just 10% of the total.
https://www.statista.com/statistics/1234074/top-one-percent-income-uk/

(And when I go back to check the IFS paper, I see the IFS data stops in 2014 - which explains the higher %)

If I Google "how much income tax do the top 1% pay UK" the first result is a summary of another IFS article dated March 2024 which tells you that "top 1 per cent pay 29 per cent of all income tax now, up from 25 per cent in 2010 and 21 per cent at the turn of the century"

So:
In 2000, the top 1% earned 12% of income and paid 21% of tax.
In 2010, the top 1% earned 12% of income and paid 25% of tax.
In 2024, the top 1% earned 10% of income and paid 29% of tax.

The tax system is clearly very highly progressive. It's also hitting the top 1% increasingly hard.

Ie tax has been getting more and more redistributive, steadily for at least the last 25 years. In complete contrast to what the divisive, populist tropes say.

I think there are two issues here.
The 1% isn't the issue. The bottom end of that would catch senior doctors and head teachers, people doing really important work and worth every penny. The issue is the 0.01% and the hoarding of profits at the top. So the likes of Jeff Besos is in space while his warehouse staff (the people doing the actual work to earn the money) are claiming top up benefits because they can't feed their families on the wages he pays. I think we could do with a global tax to catch this group.
The second for me is the tax paid on the money we work hard to earn and have to spread thinly each month compared to the tax paid on money we don't work hard to earn (including iht). We are taxed higher on money we work than money we don't, madness! And before someone accuses me of envy, most of my income is passive.

@SheilaFentiman I don't know whether it would work for you, but have you/DB and your mum looked at whether gifts out of excess income might be something she could do? On the IHT form you would have to fill in an income/expenditure sheet for each year it applied, but she could potentially pass on quite large amounts, completely free of IHT, if they are given 'regularly' (e.g. monthly) and she can afford it without affecting her standard of living. It's a way of passing on excess income, but not capital.

We are filling in the IHT forms at the moment, and my MiL spent so little in the last 7 years that in her case she could have passed on around 10k a year using this method. None of us had any idea this was the case, and if we'd known and talked it through I'm sure she would have wanted to.

This is what we are looking into atm. MIL 'earning' 4k a month and spending 1k so just accruing more and more cash.

According to a quick Google and the IFS "the top 0.1 per cent, a mere 50,000 individuals, pay at least 10 per cent of all income tax, so each pays at least 100 times more than the average"

They are also incredibly mobile. So we could easily lose a good chunk of that 10% - that's £83billion tax paid by just 50,000 individuals - if a few of them decide to give their money to a different country instead.

And it's not just the tax income. I have no idea why you think that it's the warehouse staff who do 'the real work'. Warehouse work is very easily replaceable with any other willing worker. A warehouse worker emigrating really isn't a huge loss to the UK. On the other hand, someone who makes a business successful, providing employment for many people and genuine productivity gain for the UK? Not so easily replaceable.

Thank you @TriceratopsRocks but DM’s income covers her care visits, bills, food, cleaner etc no problem, but there’s not much headroom for gifts from income. I appreciate the suggestion.

It is what it is and the estate will pay the tax when the time comes 🙂

And as for you saying that it isn't the 1% who are the problem. I agree. (although I don't think it's the 0.1% who are the problem either).

But all the bile, all the populist government rhetoric, it's all aimed at the top 1%.

As those figures show, that top 1% are being increasingly hammered - and likely to be even more so in the next budget. Not because it's 'fair', but because they're an easy target.

What I haven't looked into - but have my suspicions about - is how mobility has changed for the top 1% in the last 20 years.

Do you think it's easier or harder for the top 1% to move abroad now than 20 years ago? Their reasons for moving certainly seem to have increased, when their proportionate share of the tax burden has increased by 50%... and there's so much populist rhetoric and vengeful policy making against them.