Inheritance Tax: UK’s Most Hated Tax Lives On

Inheritance Tax

In the recent emergency Budget, George Osborne’s move to allow families to pass on estates worth up to £1 million free of inheritance tax (IHT) was warmly received, but is far less generous than it first seems.

The changes to the UK’s most hated tax, announced in July’s emergency Budget, are complicated, will only apply to the main family home and will take several years to come fully into effect. Any apparent savings may be offset by sleight of hand elsewhere.

So could your family still end up paying death duty?

In his speech, the Chancellor claimed that homeowners can now pass on up to £1 million to their children or grandchildren, free of IHT, but it is not as simple as that.

The new rules will not apply to everybody and rising house prices could still drag more and more families into the net.

Currently, IHT is paid at a whopping 40 per cent on all inherited assets worth more than £325,000, so somebody whose estate totalled £925,000 would incur IHT on £600,000, landing their loved ones a huge £240,000 bill.

Married couples and civil partners are in a better position, because they can inherit each other’s allowance, so £650,000 in total. However, if one of you is not UK domiciled, this may not apply.

There will be a new transferable amount of £175,000 on top of the above allowance for each parent leaving their home to their children and grandchildren.

But while the Chancellor is giving with one hand, he is taking away with the other

One reason so many ordinary middle-class families now pay IHT is that the £325,000 threshold has been frozen since 2009, while house prices have risen sharply in that time, especially in London and the South-East (if the nil-rate band had risen in line with the consumer prices index it would now be worth around £378,000*). This will continue to be frozen until 2021, which will whittle away at its usefulness in real terms.

The Chancellor is also taking his time over phasing in his extra £175,000 tax-free allowance. It will not kick in until the 2017/18 tax year, and then at just £100,000. It will gradually increase until it finally reaches £175,000 in 2020/21. At that point, it will be indexed to rise in line with the consumer prices index.

Worse, many families will not see any benefit at all; as the new threshold applies only to those with children or grandchildren, it will not increase your allowance if you are supporting nephews, nieces, children of friends and so on, and the tax break will apply only to the main family residence.

Also, the full £1million will not apply to cohabiting couples, because only married couples and civil partners can transfer their allowance to each other on death.

For estates worth more than £2million, the additional IHT allowance will be gradually clawed back.

The new allowance complicates what was already a tricky tax to understand and you need to take expert advice unless you are happy that your family will still be hit by IHT. Careful planning is needed to:

  • Check whether you need to update your will
  • Change the way you structure your wealth
  • Take advantage of reliefs available to you

Don’t be under any illusions; last July’s Budget did not spell the end of IHT. In fact, the annual tax take will continue to rise, if at a slower pace than before. HM Revenue & Customs raised £3.4billion from IHT in 2013/14. By 2020/21, that is forecast to collect £5.8billion*.

Take advantage of the AAM Estate Planning Service

The AAM Estate Planning Service is designed to help you ensure that your hard earned wealth is quickly passed to your loved ones with the minimum of tax payable, by providing you with a detailed Wealth Preservation Strategy identifying the key issues and providing focussed analysis and options.

If you have any questions, please do not hesitate to speak to your AAM Financial Planner or email us at

Ian Black
Head of Wealth Solutions
AAM Advisory Pte Ltd


This information is based on our current understanding of UK tax legislation, regulation and practice which is subject to change at any time. This article is not personal advice; we offer a range of information to help you plan your own finances and financial advice if requested. If you are unsure of the suitability of an investment for your circumstances, please seek advice.

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