THE number of Scottish families facing a 40 per cent inheritance tax hit is set to soar as higher house prices drag more estates into the net.
A freeze in the level above which IHT kicks in has already boosted government takings from the so-called “death tax” on assets left by people when they pass on. Now experts warn that house price inflation means a growing number of Scots are set to leave their families with a hefty tax bill on death.
Many are likely to be caught unawares, thanks to the drag effect created by government’s decision to freeze the IHT nil rate band at £325,000 until at least 2019 (£650,000 for couples).
The move, announced earlier this year, was aimed at helping fund the UK government’s reform of social care for the elderly. Yet while those plans cover social care in England and Wales only, the IHT freeze affects households in Scotland too.
The threshold has been left unchanged since 2009 in a bid to swell government tax takings. New Office for National Statistics figures show a rise of 8 per cent in the amount of IHT paid in the 2012-13 tax year.
The UK government took £3.14 billion in IHT in the year to April 2013, building on the 7 per cent growth in the previous 12 months.
Julie Hutchison, head of customer wealth transfer at Standard Life, said: “The 8 per cent increase in tax paid in 2012-13 compared to the previous year shows how this tax is generating more money for the Treasury to take rather than it going to people’s friends, family or charities.”
The increase is due primarily to the freeze in the threshold, according to Ronnie Ludwig, partner at Saffery Champness chartered accountants in Edinburgh. He warned that more families would be forced to pay IHT over the coming years.
“Since the Chancellor recently announced an unexpected extension of the freeze until 2018, this shadow tax on inheritances is set to continue – and is also set to rise as property prices and other assets appreciate in value.”
The most recent regional breakdown, for 2010-11, shows the highest amount of IHT paid was in London, the East, South-East and North-West of England. Scotland came next, with around £200 million raised in tax on estates north of the Border.
And house price inflation seems certain to drag more Scots into the net, with the value of the average home in Scotland up £2,300 this year, according to LSL Property/Academetrics.
“If the increase in house values is sustained until 2018, the combined effect of the exemption freeze and increasing property values will see the number of Scots paying IHT rocket upwards,” said Ludwig.
But there’s also evidence that people intending to leave legacies above the IHT exemption threshold are increasingly making use of the tax breaks available (see box on left for more information).
“Encouragingly, the predominance of conventional reliefs over those reliefs used for tax planning purposes indicates that tax reliefs are benefiting those who need them the most – namely surviving spouses and family members, and also charities,” said Ludwig.
Those reliefs will become more valuable in helping mitigate the tax, said Standard Life’s Hutchison.
“With HMRC extending its anti-avoidance reach to include IHT within both the DOTAS (Disclosure of Tax Avoidance Schemes) and GAAR (General Anti-Abuse Rule) legislation, it is unlikely that we will see any new aggressive IHT planning schemes in the near future,” she said.
“Therefore the best solution remains making use of the existing exemptions and beginning gifting as early as possible.”