Richest pay less inheritance tax than smaller estates

The UK’s wealthiest individuals and families with the largest estates on death are paying half the effective inheritance tax (IHT) rate of many smaller estates, according to an analysis by Canada Life, which is calling for an overhaul of the IHT tax regime

The insurer says figures provided as part of a freedom of information request show that estates worth £10m or more pay 10% IHT on average, around half the rate paid (20%) paid by estates worth between £2m and £3m.

The difference is down to what it calls ‘deep inconsistencies’ in the way different assets are taxed for inheritance purposes, which in turn leads to similarly sized estates paying significantlhy different rates of tax.  

According to Canada Life’s analysis, the main reason for this is the fundamentally different asset composition for estates of different sizes. Larger estates typically have a much smaller percentage of their value in UK residential property (10%), which does not  have high levels of tax efficient exemptions, and a much higher amount in securities (40%) which can attract 100% tax relief.

Neil Jones, wealth management and tax specialist, Canada Life, said: ‘This difference in the net tax rates paid by estate isn’t always down to the value of the estate or the different type of assets held in an estate.

‘It’s often about a willingness to plan.

‘There is a myriad of potential solutions in an adviser’s kitbag to help mitigate IHT and some smaller estates can certainly benefit from these to reduce the tax payable and increase the wealth being passed on to future generations.

‘There is also a more fundamental issue of being willing to create an estate planning strategy. It’s still somewhat taboo to talk about death and certainly many clients, and even advisers, undoubtedly find it difficult to introduce it, but it needs to be talked about.’

Jones also argued that some aspects of inheritance tax are ripe for reform, pointing out that as it currently stands, some forms of equities bought just two years before death attract 100% inheritance tax relief.

‘In our view, IHT needs to be simplified. The basic principle is simple however the piecemeal nature of the regulations can make it an uneven playing field. It will be interesting to see the second paper from the Office of Tax Simplification, looking at reliefs, when it is released in the spring and what it recommends,’ he said.  

Report by Pat Sweet

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