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Three reasons why inheritance tax is becoming a ‘perfect storm’

Inheritance tax (IHT) divides opinion, because it creates the potential for a person’s wealth to be taxed twice; firstly as it accumulates through income and/or capital gains taxes, then again on death.

A growing tax?

Although the overall IHT collected by the UK Exchequer is low compared to other personal taxes, the percentage growth in recent years has been marked, given significant asset price inflation and the nil-rate band (NRB) remaining static. The total amount of inheritance tax collected by Her Majesty’s Revenue and Customs (HMRC) for the financial year ending April 2019 was £5.4billion, up £200million on the previous year and £600million on the financial year ending April 2017. With this rate the figure could potentially hit £10bn by 2030.

As well as the growing tax take, here are three reasons to refocus on planning strategies to ensure those likely to be affected retain as much control and access to their wealth as the law allows, whilst ensuring the maximum value can be left to their loved ones. IHT planning, more than most other financial challenges, requires an early and structured approach.

1. It’s complex and takes time to grasp

Firstly, IHT is seriously complicated. A 2015 report by the Office of Tax Simplification (OTS) reviewed and ranked 107 areas of taxation and identified IHT as the third-most complex in terms of ‘underlying complexity’ and 38th in terms of the ‘impact of complexity’. The subsequent introduction of the virtually impenetrable residence NRB increased the number of reliefs and exemptions to 95, one more than was identified by the same report.

Whereas many clients have a reasonable understanding of tax residency, nationality and citizenship, an understanding of the common law concept of domicile can be more elusive. Domicile is broadly based on where a person’s permanent or habitual home is and where they intend to live indefinitely. This may or may not be the country in which they are currently resident. In some cases, a person’s domicile may be a country which they have never visited but from which their family originates (their ‘domicile of origin’). And more confusingly, there are four other domicile statuses:

  1. Dependency
  2. Choice
  3. Deemed
  4. Elected (since 2013)

Given that domicile determines one’s exposure to IHT, and the available strategies, this is a key part of the wider ‘IHT equation’.

2. Increasing investigations by HMRC

Secondly, a freedom of information (FOI) request from Quilter to HMRC shows that 5,537 inheritance tax (IHT) investigations were opened by HMRC in the 2018/19 tax year.

This is no real surprise when the area of IHT is so complex, and it is unlikely that these investigations are as a result of deliberate attempts at tax avoidance. HMRC say these investigations relate to incomplete or inaccurate IHT returns, or where an IHT return has not been received but they believe it should have been.

The number of IHT investigations has grown by around 7.8% following the introduction of the residence nil rate band (RNRB) in April 2017*, making the already complex system even harder to navigate.

3. More changes in the offing?

Lastly, there is a possibility that the current system may change. The recent Office of Tax Simplification report, can be seen here. The first part, issued in November 2018, focused on administration and the second, published in July 2019, focused on various areas of the IHT regime and how they interact with one another, notably: 

  •    - lifetime gifts
  •    - interactions with capital gains tax (CGT)
  •    - businesses and farms in relation to agricultural property relief (APR); and
  •    - business property relief (BPR).  

This, combined with the HMRC consultation from 2018 into the taxation of trusts (which is yet to be concluded), could lead to significant change in the IHT landscape. 

Whilst, optimistically this might lower the burden of IHT, recent Governments have poor form when it comes to simplification. Today’s legitimate and time proven strategies may be rendered ineffective by the political will of a Government still struggling with public sector debt, and the unknowns of Brexit.

This ‘perfect storm’ surrounding inheritance tax means getting financial advice is crucial to planning appropriately, and having confidence that any strategy enacted will have the desired effect, both in lifetime, and upon death.  Has there ever been a more relevant time for financial advisers to consider tax-efficient wealth transfer?

For more information on how investing in an Old Mutual International offshore bond can mitigate an IHT liability, visit


*FOI received 15 July 2019, shows the number of IHT investigations opened in 2016/17 was 5138, and in 2018/19 this rose to 5537.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth or Old Mutual International's interpretation of the relevant law and is correct at the date shown on the title page. While we believe this interpretation to be correct, we cannot guarantee it. We cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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