As Britain eyes inheritance tax (IHT) reform, its wealthy need to ensure they don't get caught napping, warns Dave Elzas.
Sometimes dubbed Britain's most hated tax, inheritance tax often leaves people feeling like they've been unfairly cheated out of income. It's hardly surprising then that efforts to reform the tax, under the guidance of chancellor Phillip Hammond, have received so much scrutiny.
While most of these reform efforts are focused on simplifying the tax, they're being undertaken against a background of (Brexit-induced) economic uncertainty. That means there'll be considerable pressure to ensure that the reforms also result in increased revenues.
Naturally, high net-worth individuals (HNWIs) have baulked at the idea they might be adversely affected by the reforms. Whether or not that turns out to be the case, there's evidence to suggest that Britain's wealthy may be impacted more by their own inaction than any actual legislation.
Reform and ‘stealth taxes'
According to a 2018 survey conducted by Wealth Club, HNWIs are among the fiercest critics of Britain's inheritance tax. While most are more than happy to pay income tax, 73% of HNWIs think that inheritance tax is unfair or grossly unfair and 85% consider the rate too high.
With two in five HNWIs ready to emigrate in the event of a tax increase, any increase to the current inheritance tax is likely to be a point of conflict.
Given that inheritance tax receipts reached a record £5.2bn in 2016-17, they wouldn't be alone in resenting any further increases.
While the government hasn't signalled any intention of raising inheritance tax rates (the current reform process is largely focused on easing the administrative burden on grieving families), it's under increasing pressure to create revenue wherever it can.
Certainly, recent changes to the regulations around the probate fees needed to take over control of a deceased person's estate have already set off alarm bells in some sectors. Under the new laws, family members will be expected to pay up to £6,000, depending on the value of the estate. That's a dramatic increase from the current flat fee of £215.
Described as a "stealth tax", it has prompted widespread anger and threats of a revolt in the Commons.
While £6,000 is hardly an inconvenience to the estate of an HNWI, it'll likely be seen as the first of many increases to come.
The need for proper planning
While the anger around proposed inheritance tax increases would be understandable, it's worth noting that HNWIs could save themselves a lot of pain simply by being better prepared.
With proper estate planning, HNWIs can avert a lot of administrative pain for their beneficiaries and ensure that their wealth gets passed on in the way they'd like it to.
While HNWIs may have extra considerations when it comes to estate planning, especially when they have assets in other jurisdictions subject to differing tax and legal regimes, such obstacles shouldn't be used as an excuse to put off planning.
Even when there is planning, it's important that it's done properly. Failing to do so can have serious consequences for an estate's beneficiaries. Let's say, for instance, that someone is planning on leaving their house to their grandchild. The rapid rise in UK property values over the past decade or so means that the potential tax liability is huge, turning the inheritance into a burden.
As such, it's vital that provision is made for the beneficiary to also receive enough cash to deal with the tax liability. Another option is for the estate holder to gift the house to the beneficiary while they're still alive. As long as they live for another seven years and pay rent at market value, the house will be exempt from IHT but don't forget other taxes may apply such as Captial Gains Tax.
Don't get caught napping
While it's therefore clearly imperative that Britain's HNWIs not get caught napping when it comes to inheritance tax reform, it's also vital that they execute their own estate planning properly. It's also important to remember that international families may also own assets in the UK and this means HNWIs with very little connection to the UK can also come within the scope of UK IHT.
In both cases, HNWIs may have more options than are immediately apparent. Importantly, these individuals don't necessarily have to find and execute these options themselves.
A multi-family office, for example, can take care of a variety of services including tax and estate planning. They can also co-ordinate finance professionals across a range of geographies and tax jurisdictions, ensuring that your legacy unfolds according to your vision while still meeting all the relevant regulations.
Ultimately, if you have access to expertise, why not use it? It'll save you worry in the here and now and prevent unnecessary stress for your beneficiaries in the future.
Dave Elzas is founder and CEO of Geneva Management Group