There has been recent speculation that the UK Government is considering cutting (or even, abolishing) inheritance tax (‘IHT’) in a bid to win votes at the next election. Despite being a tax only paid by the top 5% of wealthiest individuals, IHT is often referred to as ‘Britain’s most hated tax’. Many people believe that having been subject to taxation during their lifetime, they should be allowed to leave those hard-earned assets in full to the next generation (without them having to pay a further 40%).
IHT currently raises £7 billion a year, representing a substantial increase in receipts over the last few decades, largely due to rising property prices. However, this amount is relatively small when compared to the receipts for income tax and VAT, which may be why the government feels abolishing IHT or making the rules more generous to taxpayers is a viable option.
The IHT rules we currently have permit individuals to carry out planning to mitigate inheritance tax. It is estimated that £4.5 billion of IHT is not paid due to individuals using existing reliefs and exemptions. However, there are more limited options when it comes to planning around UK residential property.
UK residential property has long been an attractive asset class for offshore buyers, who see UK real estate as a safe investment. Historically, offshore structures could protect international buyers from capital gains, inheritance tax and public disclosure of their ownership. Over the years these protections have been eroded, but not all offshore structures containing UK real estate have been reviewed to see if they are still worthwhile.
Complex rules now bring loans and collateral used to acquire an interest in UK residential property or fund a structure owning this asset class into the scope of inheritance tax, and we are regularly seeing trustees unwittingly trigger tax that careful planning could have mitigated. Furthermore, as some of these changes were only introduced in 2017, we are seeing IHT liabilities on the death of non-resident individuals who were completely unaware of the changes. HMRC expects individuals with UK residential property interests (personally held or in structures) to both receive tax advice and regularly update it.
Not all advisors specialise in this area, and HMRC are not sympathetic to individuals or corporate service providers who (through no fault of their own) have received bad advice from someone who did not fully understand the rules or how to apply them. Unfortunately, the onus is on the taxpayer to get it right; which makes choosing the right advisor more important than ever.
It is worth noting that Labour has already announced that if they get into power they would reverse any IHT abolishment introduced by the current government. This means if there is any change, it could potentially be very short lived.