Death and Taxes

I apologise for talking about a rather morbid subject at this festive time of year but I couldn’t help but notice that one of the more significant features of the Chancellor’s Autumn Statement had gone virtually unreported.

This is particularly strange because Inheritance Tax has, in the recent past, been one of the more politically divisive taxes on the statute book. The background to this is the pre-election position of the Conservative Party which talked about raising the threshold from the current £325,000 to £1 million and the financial crisis and the last election result which, between them, have changed everything or so it seems.

Most tax reliefs are increased every year by the rate of inflation (of which more later) but that is not the case with Inheritance Tax. The annual lifetime exemption has been at £3,000 for over 20 years but, more importantly, the Chancellor has now confirmed that the threshold will be frozen until 2015. Since there has already been no increase since April 2009, that means at least six years in all.

Even then, the threshold is stipulated to increase in line with CPI inflation rather than the more familiar RPI. For those who are unfamiliar with these initials, there are two main differences. First there is a difference in the factors included as CPI, for instance, does not include housing costs. Secondly, there is also a mathematical difference in the way the figures are calculated. The result of this is that CPI inflation is usually lower than RPI inflation (5.0% as against 5.4% in the most recent figures). If there is an average rate of 5% over the six years then that would mean inflation of over 40% in total. Many economic observers believe that the Bank of England’s policy of quantitative easing will indeed mean a prolonged return to inflationary times.

Whatever the figure, this means that there will certainly be a substantial real terms cut in the value of the Inheritance Tax threshold and those who are below it today may not be when they die – which is of course the important time. Those already within the tax net may find that their potential liabilities are increasing every year – even when inflation linking resumes. In other words, the Chancellor announced an increase in Inheritance Tax without anyone really noticing or complaining. That is certainly unusual.

This is not intended to be a counsel of despair - far from it. Provided that planning is undertaken in good time there are usually a number of options available to reduce or avoid hefty tax bills. The crucial thing to remember is that the sooner it is done then the more options are available. If you are going to ask for advice then the best time to do it is probably now. In most cases there is a good solution which takes account of your needs. Nor does thinking about Inheritance Tax planning mean that death is just round the corner.

 Bob Wheatcroft

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