Recent figures show that HM Revenue and Customs is collecting more inheritance tax than ever. To some extent this can be put down to the increase in property prices in some parts of the country and the improving performance of investments, combined with the on-going freeze in the threshold at which inheritance tax becomes payable. However, that is probably not the whole story.
There seems to be widespread confusion between the concept of tax avoidance which has long been regarded as perfectly legal and tax evasion which is not. In a free society there is no legal reason why an individual or corporate body should not arrange their affairs, within the letter of the law, to minimise the amount of tax they are liable to pay. If the government takes exception to this then the government needs to look at the inadequacies or gaps in legislation and use its powers exercised in parliament to tighten up the law and not simply muddy the waters by correlating permitted avoidance with illegal evasion and using the term avoidance when they mean evasion. In recent years the government has taken the view that certain types of ‘avoidance’ should be banned, such as the use of transactions which do not have a commercial merit or violate the spirit of tax legislation.
Because of the confusion, it is likely that some people have been deterred from planning their affairs to legitimately minimise the amount of inheritance tax payable when they die.
For the most part, people will have built up their estate through hard work and thrift. They will have paid tax on their earnings and then on their savings and investments. The individual inheritance tax threshold is currently £325,000.00 and anything above that, which is not covered by reliefs and exemptions, is taxed at a quite hefty 40%. The tax legislation itself provides for exemptions and reliefs but frequently people are unaware of these or fail to use them, which is when inheritance tax becomes payable unnecessarily.
It has been said that inheritance tax is a ‘voluntary tax’ because it is possible to plan to reduce or negate its impact. Don’t let the confusion between avoidance and evasion deter you from putting your affairs in order to prevent the tax man taking more than he should.
Steps to legitimately avoid or mitigate the effects of inheritance tax may take the form of making gifts, using tax efficient investments or putting in place a will which exploits available reliefs and exemptions. We can advise you on these and more and so with a view to keeping more of your estate lawfully out of the hands of the taxman.
For further information, please contact a member of our Wills & Wealth Planning team on 01625 442100.