With a looming general election, us tax professionals always have one eye on what that might mean to taxation in general, and for our clients in particular.
In my case, the plat du jour is always inheritance tax. That has very much been a tale of 3 halves for the Conservatives. As partially detailed my previous blog here, for 6 years after coming to power, they effectively raised the IHT take by freezing the IHT tax free allowance (known as the nil rate band). This does seem somewhat at odds with the notion that the Conservatives are generally more amenable to wealthier individuals, especially when you consider that Labour had been regularly and happily increasing the nil rate band throughout the 2000’s. Still, austerity was the word of the day back then.
Then in a volte-face, they introduced a new nil rate band attaching to property that is gifted to lineal descendants. This basically had the effect of taking estates in the south of England which contained relatively modest, but nevertheless quite expensive houses, out of the IHT net. It could (and should) have been achieved by unfreezing the normal nil rate band and putting it back to where it would have been had they not decided to freeze it in the first place. Of course, that would not have generated the same kind of ‘home saving’ headlines and political fanfare.
Whilst the ‘normal’ nil rate band stayed frozen, the new residential nil rate band then increased year-on-year between 2017 and 2020.
Then, in a further volte-face, they decided to freeze that allowance increasing the effective rate of tax again (when compared to inflation). Both allowances are now frozen until at least 2027.
So… who knows what Conservative inheritance tax policy actually is? It is therefore quite understandable that we have next to no idea what attitude a Labour government might take. It does seem unlikely that they will take a more lenient approach than the Conservatives though, so we generally expect the IHT regime to either remain the same or to tighten. It is already anticipated that capital gains tax will be made more onerous under Labour.
European Inheritance Taxes
If you fancy escaping this Sceptred Isle to the mainland in the hopes of avoiding IHT then, what are your chances? Ignoring for the time being issues of domicile (which would take multiple future blogs to cover), I did find a fantastic recent article (here) that explains the different tax rates across Europe and would highly commend it to anyone with a vague interest (there are pretty graphs). The point that stuck out to me is that it is only the UK and Denmark that levy duties against an estate. In most other Countries, inheritance taxes do exist in one form or another, but typically in the form of a gift tax payable by the recipient.
There are only 8 EU countries that don’t levy any estate or gift taxes: Austria, Cyprus, Estonia, Latvia, Malta, Romania, Slovakia and Sweden. If you include EFTA countries then Norway joins this party.
It is also clear that inheritance taxes still account for very little of the overall tax take. It is only in France and Belgium that inheritance tax accounts for more than 1% of the overall tax take. The UK in that picture ranks in 4th place (behind Belgium, France and Finland) with a 0.71% take. Therefore if you favour inheritance taxes as a method to prevent accumulation of wealth amongst the minority, we do seem to have one of the more progressive current systems in Europe, which might surprise a few.
Worldwide Inheritance Taxes
One of the main sources of that article was a very detailed guide produced by EY, covering all such taxes in most worldwide Countries. It makes for compelling reading, and no doubt goes some way to explain why Australia is a popular destination for wealthy ex-pats (hello Lord Sugar)… You can find that guide here.
Estate planning is a complicated affair and if you have any queries relating to this article, or your own inheritance tax position, please do not hesitate to contact the writer by email or on 01494 893 533.