The latest official Inheritance Tax (IHT) statistics reveal the link between wealth rising as the economy improves and the amount of tax paid.
Although Prime Minister David Cameron promised to raise the IHT threshold to £1 million to stop hardworking families bearing the brunt of a tax aimed at raising cash from wealthy estates, he reneged on his pledge in the Parliament.
He had to ditch the policy to appease his Liberal Democrat coalition partners.
Now, he has announced the Tories will include the pledge in their next manifesto for May 2015.
HM Revenue & Customs (HMRC) collected £3.4 billion of IHT in the last tax year – the highest amount in six years, when £3.7 billion was paid in 2007-08 and just below the £3.5 billion collected in 2006-07.
The key takeaway here is those two years were the height of the pre-downturn property bubble.
HMRC observed a causal chain – as property prices, personal savings and investment value rise, so does the value of estates. And as those values rise, so does the amount of IHT collected.
The problem for families is arranging their finances to minimise IHT while the threshold for paying tax sticks at £325,000, where the government has pegged the level since April 2009.
IHT is paid at a flat rate of 40% on the value of an estate above the threshold.
The figures are based on the estates of 265,000 deceased taxpayers – but only 16,000 (6%) paid IHT.
In 2011-12, only 2.9% of estates paid IHT – which shows the number of estates coming into the IHT net doubled in that short time.
Buy to let poser
Standard Life’s personal finance expert Julie Hutchison said: “As HMRC says, the amount of IHT paid is rising in line with the increasing value of personal assets.
“People can do a lot to reduce the amount of tax they pay by utilising the many IHT reliefs and allowances. Wealthier households can look at gifting cash, but they need to keep robust records to show the gift was actually made and the money changed hands.”
One worry about IHT is the rise of the buy to let landlord.
Figures from mortgage lenders Paragon show the average landlord they deal with has around 10 to 12 properties worth about £1.4 million. On top of this, they are likely to have a family home and other savings and investments.
Many of these landlords are now approaching retirement and need to consider their estate planning arrangements to minimise IHT.