No normal person likes paying tax. You get the occasional virtue-signalling politician pretending they don’t mind, but they’re being ever so slightly disingenuous.
However, for a society to function effectively, government requires an income stream and the bulk of that comes from taxes (in our part of the world it does, at least). So tax is a necessary evil – we can probably all agree on that. But some taxes seem more evil than others, and in the UK it’s inheritance tax (IHT) that tends to top that list.
IHT punches massively above its weight in that the stress and worry it causes (and the accountants’ fees it gives rise to in order to avoid it) are inversely proportional to the impact it has on state finances – it makes up about 1% of government income.
This isn’t a tax textbook – basically, IHT is charged on your estate (effectively, what you own less what you owe) when you die and can also be payable during a person’s lifetime on certain trusts and gifts. The rate of IHT payable is 40% on death and 20% on lifetime gifts. There is a nil rate band, currently £325,000, below which no IHT is payable. That goes up to £425,000 if the family home is passed on to close relatives.
Is IHT a ‘bad’ tax? There are two issues that wind people up when it comes to IHT:
- You are paying tax on assets that you have built up from income that had already been taxed during your life. You are being taxed twice therefore.
- The family home forms part of your estate. House price inflation has been rampant in the UK for years. People are being inadvertently dragged into the IHT net by forces outside their control.
Being taxed twice is hardly unusual. Think about VAT. If you earn £100 and are a basic rate taxpayer, you pay £20 tax thereon. You take your £80 net income and buy something shiny from John Lewis. That £80 spend is actually £66.67 plus £13.33 VAT. As a private individual, you’re the end of the VAT chain so you suffer that cost. You’ve effectively been taxed twice therefore – once when you earned it and again when you spent it. Fair?
The family home argument is a tough one. An extreme example – I have a client whose (very) elderly parents live in a flat in South Kensington. They’ve had it since the late 1940s when property in London was cheap. It’s now worth something ridiculous, say a conservative £2m. They have nothing else. If they die tomorrow, and pass the flat to their only child when they die, the IHT bill at current rates is likely to be around £460,000. The child rents currently, so would love to live in the family home again. But where does she get £460,000 from without selling the flat? Fair?
That’s a dramatic example, but we are seeing more and more people being forced into thinking about IHT and how to avoid it (not evade, note) because of this house price issue. If it affects you – don’t ignore it.
The kids will probably thank you.
Chris Martin is a chartered accountant and business advisor and has been helping franchisees create and grow wonderful businesses for over 20 years. He is a published author and has written extensively on franchisee tax issues. He passionately believes that whilst franchising is a deservedly successful business format, franchisees are often let down by their franchisors’ failure to offer support and guidance regarding the financial side of running the business. This leaves franchisees frustrated, overwhelmed and unable to grow their businesses to the extent they should. Chris has developed simple systems, support and guidance to ensure franchisees create businesses that provide them and their families the lives they so richly deserve.