Before the election Mr Osborne promised big changes to Inheritance Tax. This proved surprisingly popular, despite the fact that most people will not be in the bitter sweet position of having to pay it. There is a £325,000 tax free allowance, which takes care of most people’s estates that they wish to pass onto their children or other relatives. It is of course tax free to pass it on to your spouse, partner or charity of your choice. A married couple effectively have a £650,000 tax free sum available if they have that much wealth.
I guess the reason it was popular is many people think their family might become trapped by IHT. After all more and more homes in the dearer parts of the country are now worth more than £325,000. That does not even buy you a bedsit in central London, nor a house in much of the rest of Greater London. There are areas of expensive property in a wide range of locations around the nation, from Sandbanks in Dorset and Newquay in Cornwall to Cheshire and central Edinburgh. Maybe it also shows that jealousy is not such a great political emotion , with many thinking those who have saved and built up assets for their family have a right to pass more of it on.
I am not recommending any reduction in IHT given all the other tax priorities and spending needs of the present fiscal bind. There is, however, plenty of complexity to grapple with. It might be possible to make it easier to understand and follow. Much of the complexity comes from the idea that you should be able to pass all your money on to your family tax free if you can guess when you are going to die, and give any excess away seven years before you do so. You can then keep £325,000 worth for yourself, and give that away tax free at the end. The government has put in a series of complicated rules and rates to keep people to the 7 year Russian roulette.
If you do transfer assets and dare to die sooner than seven years you pay the tax, but there is taper relief so the tax is reduced the longer you managed to hang on. Gifts of up to £3000 a year are exempt, as are small gifts of up to £250. CGT can also come into play on death as well, adding to the complications, if you gave away an asset prior to death or sold it below true value which counted as a disposal. It all makes profitable work for the solicitors and accountants who are needed now to help people organise their dead relative’s affairs.
Is this the right way to handle inter generational transfers? What is the magic of the seven years? Is transferring most of your asset seven years before you die prudent management, or unacceptable tax avoidance? Is £3000 a year of gifts per person a sensible allowance? Is £325,000 too low a tax free limit? Or are you against inheritance in principle, and would you like to see a much lower tax free amount?