The word inheritance tax brings a frown to most faces, while for some it is an instrument of social equality. Regardless of how we perceive it to be, there are many myths surrounding this type of tax which further complicates our understanding of it.
In the following section, we bust some of the common myths about IHT:
It’s a great way for governments to earn money
Despite the high taxation rates of IHT, it is also a tax which can be easily avoided. In the financial year 2014-2015, HMRC raised £3.7 billion worth of IHT which only accounted for 0.7 percent of the total taxes collected. On the other hand, VAT added £11 billion to the HMRC treasury which is nearly 30 times the amount collected as IHT.
We had earlier mentioned how many people view the IHT as a tool for social equality. The reason why we said that is because the present taxation system earns more from earned wealth than from unearned wealth which is unfair to many.
That being said there is plenty of scope for the government to levy higher taxes on the UK’s richest, who also happen to be the biggest evaders of IHT. The top 10 percent of the UK’s wealthiest households are believed to have 850 times more wealth than those that fall in the bottom 10 percent. IHT can help to reduce the inequality in terms of wealth.
It only Affects the Super-rich
On paper, the IHT tax is certainly not immoral even though it may seem unfair when implemented. There are various ways to avoid inheritance tax and the super-rich do not fail to make use of any technique to pay lesser tax. The burden of IHT mostly falls on the middle classes, especially those who own houses in London and south-east of England. According to Prudential they are the biggest contributors towards IHT with an average bill of £166,000. This has been attributed to the nil-rate band which has been set at £325,000 and the sharp rise in house prices.
£1 million can be passed tax-free
The present nil-rate band has been set at £325,000. If it goes unused it can be transferred upon death to be used up by the surviving spouse making the total available Nil rate band £650,000. An additional exemption of £175,000 is provided to each person who leaves behind their estate to their direct descendants.
One may assume that the total exemption available will be £1 million. However, this exemption is only available for those passing on family homes in inheritance and the added exemption cannot be availed if you have been supporting nephews, nieces, friend’s children and so on.
Partner’s Inheritance is IHT free
Most people who are married or in a civil relationship tend to believe that inheritance tax is not an immediate concern. They are of the opinion that when they die everything will get transferred to their spouse automatically and therefore the estate will be exempted from IHT.
However, if the estate owner dies without leaving behind a Will, intestacy laws will be applicable on the estate. When intestacy laws are applied it is possible that the children may inherit from the estate meaning that IHT will be payable on the share that they have inherited. By writing a Will, one can transfer the whole legacy to their spouse and in this way avoid any inheritance tax which could be applicable on the estate. Writing a Will has become extremely easy and convenient these days as many free Will templates are commonly available.
Giving away all money before dying means no IHT
If only this was true! But HMRC is too wise to fall for such tricks. Tax laws dictate that you have to survive for at least seven years after a gift has been made. If the person giving away the gift passes away before seven years have passed, the gift will be considered as a potentially exempt transfer and falls back into the estate making it liable for IHT if the estate’s worth exceeds the nil-rate band.
However, it is possible to reduce the total IHT payable by making gifts worth £3000 each year. These gifts can be given to any person of your choice and does not necessarily have to be given to a spouse or family member. Tax laws also allow you to make gifts worth £250 over the exemption of £3000. But a person who has already received a gift under the £3000 exemption cannot be given another gift worth £250.
We hope the above information clears any misconception you may have had relating to inheritance tax. It is important to have a clear understanding of IHT rules so that one can write a Will which doesn’t flout any tax rules or attract huge tax bills.