Wealth Management Update July 2024
Total receipts from Inheritance Tax hit £1.4bn in May, with a staggering £701m being received in that one month alone. This means that income from IHT is £200m more than this time last year. The Office for Budget Responsibility expects the income from IHT to increase to £9.7bn by 2028/29.
So, what is going to happen with this tax now the election has been decided?
The answer is, probably nothing.
IHT is one of the simplest taxes to collect. When someone dies, their estate is frozen and the executors can’t get hold of the assets until the tax is paid. It is that simple, and so the HMRC loves this tax. They love it so much that they now employ Deliberate Deprivation Officers whose job it is to find those who are trying to ‘avoid’ IHT, principally by not declaring assets when probate is applied for.
Interestingly, at least half of the tax could probably have been legally avoided if people had put the right tax mitigation plans in place before death. But sadly, too many people don’t know how the tax works and get caught out by the details.
What’s the biggest mistake people make?
When it comes to death, what do you think is the biggest mistake people make? The answer is, failing to apply for probate on first death when all assets automatically pass to the spouse.
As there is no Inheritance Tax between spouses, many people think that probate does not need to be applied for when the first spouse dies. This is an easy mistake to make because the house, the joint bank account, or joint assets, automatically pass to the spouse. But, this will cause problems when the second person dies as there will be no HMRC records of the first death, which then makes it very difficult to file for probate and claim the first spouse’s allowances, which should have been carried forward to the surviving spouse.
The rule of thumb: Always apply for, and gain, a grant of probate, no matter the size of the estate or if there is a spousal allowance.
Inflation falls…but what now?
Isn’t it annoying how the HMRC does not reduce rates when the rest of the country does?
The present rate of interest on unpaid IHT liabilities is still 7.75%. This means that when someone dies, and their estate is liable for IHT interest is charged until the liability is due. In our experience, this liability is often not paid for 6, 9 or even 12 months because the estate is still being dealt with by the executors. If the tax is paid after 12 months, it effectively means that the IHT rate is NOT 40% but 47.75%! That’s nearly half of your taxable estate going to the HMRC.
The best solution to this is good organisation. If your executors know where everything is, what you have and can access your estate the whole probate process is much easier and quicker. And so, ask yourself; ‘if I died today who will deal with things and have I put things in order so that they can do things easily and quickly?
The Recession is Over
In June, the Office of National Statistics announced that inflation had fallen to 2% in May. This means that prices, as defined by the ‘basket of goods’ that are selected, rose in price by 2% in the year to May.
Why the fall and what now?
If you have been following the reasons for inflation, you will know that there have been several factors that have been driving UK inflation. These boil down to two things: restriction of supply and increase in demand. Inflation is the ‘price of money.’ As supply falls price goes up, and as demand increases supply also goes up.
We are still dealing with the restrictions in supply that were caused by two things: the pandemic and Brexit. These two factors, as we predicted, have now pretty much fallen away from the calculations; this is the main reason why inflation has fallen.
If inflation has fallen, what does that mean? Apart from the fact that prices increase more slowly.
The impact is psychological. If people think that prices will not be increasing, then they tend to save more and feel better. If inflation is high, people spend more to buy things before prices increase. This has the effect of prices increasing even more! Therefore, if people save more because they are confident that prices will not increase, inflation will fall further, and it becomes a self-fulfilling prophecy.
The second impact is on interest rates. The Bank of England uses interest rates to control spending. As inflation falls you would think that the interest rate increases to slow spending, however, the government is keen for the economy to grow and so will want to encourage spending. To stimulate growth, the Bank of England will reduce interest rates. However, there is about a 6–9-month time lag between inflation and interest rates. This is the reason why the Bank of England has not reduced interest rates already.
What can we conclude from all of this?
People will feel more wealthy and happier, and interest rates will fall shortly, driving the economy and house prices upwards, resulting in people being even happier and even more wealthy.
If you were wondering why the Prime Minister called the general election, you can now see why. From his point of view, the question is, did he call it too early?
Beware the traps of a Deed of Variation
A deed of variation is a highly effective tool for Inheritance Tax planning. It allows a beneficiary, within two years of the deceased’s death, to redirect inherited property to others or a trust. This transfer, if formalities are observed, is treated for Inheritance Tax as if made by the deceased.
This mechanism can yield significant benefits. For instance, if a mother leaves her estate to her adult daughter, who is already wealthy, the daughter might face her own Inheritance Tax issues. She may wish to pass the inheritance to the next generation but still retain some access to the funds. In such cases, she can use a Deed of Variation to place the inheritance into a Discretionary Trust, where she is a Trustee and potential beneficiary. This way, she maintains access through capital, or income appointments, or interest-free loans, effectively removing the inheritance from her estate without a direct transfer.
However, there are important considerations. The variation into the trust does not constitute a gift with reservation for Inheritance Tax, as the deceased mother is the Settlor for this purpose. Yet, for Income Tax, the daughter becomes the Settlor, meaning any trust income is taxed on her. To mitigate this, Trustees might invest in low-yield or non-income-producing assets like Investment Bonds. Future appointments to other beneficiaries can shift any Income Tax liability from chargeable events to those beneficiaries.
A critical issue is the residence nil rate band. If the deceased mother’s estate qualified for this, and the house is sold, transferring the entire estate into a Trust can forfeit this band, potentially costing up to £140,000 in Inheritance Tax. Therefore, it is crucial to ensure that a portion of the house, at least equal to the available residence nil rate band, passes outright to the daughter, with the balance going into the Discretionary Trust. This careful planning can optimize tax outcomes while providing financial flexibility.
State Pension boosting deadline extended, again, to April 2025
The deadline to top up missing National Insurance years between 2006 and 2016 has been extended to 5 April 2025, with the price frozen at current rates. This extension gives you more time to check records and potentially boost your state pension.
Originally set to end on 5 April 2023, the deadline was first extended to 31 July 2023 due to many struggling to access vital information through official helplines. Now, pension savers have until 5 April 2025 to pay voluntary contributions, potentially increasing their future pension.
Qualifying years can be earned through employment or certain benefits, yet many still lack enough to claim the full state pension. Paying to fill gaps can be very beneficial; for example, spending £800 could yield £5,500 in returns.
The deadline extension is in response to high demand. Pensions Minister, Laura Trott, noted the importance of allowing more people to review their state pension and add extra years to their National Insurance record.
Earlier this year, it was revealed that official helplines run by the Department for Work and Pensions, and HMRC, were overwhelmed, preventing many from getting needed information. The extended deadline should ease pressure on helplines, though it’s not guaranteed.
Normally, you can only top up gaps from the previous six tax years. However, the 2016 introduction of the new state pension system included “transitional arrangements” allowing gaps to be filled back to 2006. These arrangements were set to end on 5 April 2023 but now extend to 5 April 2025.
Further information can be found here: Online voluntary National Insurance payments service launches – GOV.UK (www.gov.uk)
