Inheritance tax – who pays the most?

A recent Freedom of Information request by Canada Life suggested that estates worth a total of £10 million or more paid an average of 10% inheritance tax, while estates worth between £2 million and £3 million paid an average of 20%.

So, why are smaller estates paying more in inheritance tax?

The type of assets

This difference in inheritance tax payment isn’t always down to the value of the estate, but it can be because of the types of assets that are held by the estate.

Certain types of assets, such as business property and agricultural assets, receive beneficial treatment for inheritance tax purposes and these assets tend to make up a higher proportion of the total assets held in larger estates. These reliefs exist to enhance the economy by ensuring that businesses and farms are not jeopardised by a significant inheritance tax bill following the death of a primary owner.

Before now, the average person might have been unlikely to acquire these types of assets and therefore benefit from the reliefs. However, there are now financial products and strategies available which mean they may be able to invest in and support these sectors, and potentially benefit from the full range of associated inheritance tax reliefs.

Forward planning

Industry research shows that those with larger estates have a greater recognition of the value of tax planning and conversely, those people with lower value estates are more reluctant to engage in tax planning. As a result, often those with smaller estates are not seeking the most effective advice and taking the steps required to claim reliefs and exemptions available to them.

A recent survey by HMRC indicates that the majority of those people surveyed were unaware of the inheritance tax implications of gifting assets and income. Within this research only 1/8 of the population were identified as being ‘gifters’, with the value of most gifts being under £4,000. Only 58% of the ‘gifters’ surveyed were able to correctly answer more than 5 of the 8 inheritance tax questions presented to them. Careful advice is always required where a gift is contemplated, and if planned and structured correctly they can be a useful tool to reduce inheritance tax.

Other options for tax efficient estate planning may include a carefully drawn up Will which utilises all the reliefs available.

It is clear that forward thinking is one of the best ways to mitigate inheritance tax and there are solutions available to taxpayers who are willing to plan for the future. We would recommend that you contact us to review your estate, identify your inheritance tax liability and the potential tax planning opportunities that may be available to you. For further information please speak with your usual Kreston Reeves adviser or contact us here or on +44 (0)330 124 1399.

Join over 8000 businesses and individuals who receive our complimentary e-bulletins by signing up here.