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Inheritance tax;
a voluntary levy for those who do not plan ahead - Part 2

Research does not always produce the result you would expect

We often hear that the Inheritance tax [IHT] nil rate band needs to rise due to the increase in house prices, however, the attached chart shows this not the case. The average house price has not exceeded the IHT nil rate band at any time over the last 70 years. Yet the chart from the last edition shows a clear increase in the number of people’s estates being caught by IHT.

We also hear that people are not saving enough, which again on the face of things, may well be true. We are certainly not saving enough into pensions. However, considering the data in both charts it is obvious that more people are becoming more wealthy [they fall inside the IHT thresholds] because, the money paid into the mortgage acts as a lifetime savings plan causing people to accumulate more wealth than ever before.

A mortgage is more appealing to savers than a pension

As a savings plan, a mortgage to buy a house is more appealing to savers than a pension. Let’s face it; after all a nice pile of bricks is more attractive than a piece of paper. Add in the positive effects of gearing and we can see some of the benefits of home ownership over pensions.
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From a tax point of view things are very different

Pension payments can be paid from your business as a business expenses or free from personal tax and never form part of your estate. A personal mortgage payment is made after tax and national insurance and the asset forms part of your estate for inheritance tax purposes. Not exactly tax efficient, you will agree.
The introduction of the Main Residence Nil rate band is therefore more of an additional allowance to recognise savers.

The allowance will relate to the equity in the property only after any mortgage has been deducted. It can only apply to one property [the representatives can decide which property, if there is more than one in the estate]. However, the deceased must have been resident in that property at some time [rental properties do not qualify unless the deceased has resided there]. Also, the main residence nil rate band is only available to beneficiaries who are direct descendants of the deceased or their lineal descendants.  

The Main Residence nil rate band, if passed into law, will become available from the 2017-18 tax year. Increases have been set until 2020-21 after which it is set to increase in line with CPI. For estates over £2 million the Main Residence allowance will be reduced by £1 for every £2 over £2 million.

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A word of caution; none of these proposals are set in law and therefore could be changed or scrapped altogether. Delaying Inheritance planning based on these proposals could therefore be damaging to your financial objectives and house prices may rise faster than planned increases.

These plans should reduce the number of IHT payers, but there will still be many more IHT payers than 30 years ago. The really wealthy will employ someone to help reduce their liability. If you are likely to become one of those 40,000 extra IHT payers, you should seek some advice sooner rather than later. Inheritance tax planning is not just for the super-wealthy. Tax treatment depends on individual circumstances and may be subject to change in future legislation.

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