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Accidental millionaire? The tax bill you need to prepare for now

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Written by: Paloma Kubiak
05/10/2016
The number of millionaires in Britain has shot up in the last five years, meaning more families could be hit with an inheritance (IHT) tax bill.

Analysis of HM Revenue & Customs’ statistics shows a 27% rise in the number of millionaires between 2008-2010 and 2011-2013, to just over 409,000.

Based on this rate of increase, NFU Mutual estimates the UK will have almost half a million (495,000) millionaires by the end of this year and around 585,000 by 2020.

Many of these people are unwittingly becoming millionaires due to rising property prices and may not realise their loved ones will need to pay IHT when they die.

IHT is a 40% levy on a deceased person’s estate if it’s worth more than £325,000, the tax-free IHT allowance, which is frozen until 2021.

Just this summer it was revealed HMRC raked in a record £4.7bn in IHT receipts in 2015/16, up 22% from the previous year, proving that more people are falling into the wealthier bracket.

Sean McCann, chartered financial planner at NFU Mutual, said: “More millionaires means more inheritance tax for the Treasury. These figures show that the taxman is set to take an ever greater slice of people’s estates over the next few years as house prices and share prices have boosted the wealth of the nation.

“It is becoming ever more important that people plan ahead for inheritance tax bills. There are plenty of simple ways to maximise the amount that will go to those who are left behind.”

Top tips to protect your family wealth

Here are three top tips to help you minimise inheritance tax, but see YourMoney.com’s Protecting family wealth: 10 tips for cutting inheritance tax for more information:

1) Gift allowances

There are several allowances for gifts which are automatically exempt from IHT:
• Every year you can gift £3,000. This allowance can be carried forward one tax year if unused;
• You can make unlimited small gifts of £250;
• Gifts between spouses or for the maintenance of children, ex-spouses or dependent relatives are also exempt;
• Gifts to people getting married are exempt: up to £5,000 for your child, £2,500 for your grandchild or great-grandchild, and £1,000 for anyone else.

2) Buying company shares

Shares in qualifying, unlisted businesses qualify for 100% Business Property Relief (BPR) provided they are held at death and for two of the preceding five years. This means there is no IHT to pay on their value. If you don’t want to give away assets and you are happy to take some risk with your investments, you could consider buying shares to pass on to your beneficiaries.

Qualifying investments quoted on the Alternative Investment Market (AIM – the London Stock Exchange’s market for smaller companies) qualify for BPR and can also be held within a tax-free Individual Savings Account (ISA).

The Enterprise Investment Scheme (EIS) was set up to encourage investment in small private companies that might otherwise struggle to raise capital. Investors benefit from a range of tax reliefs including up to 30% upfront income tax relief, and full IHT exemption after a two year holding period.

3) Pension pot

The pension freedom rules mean you can draw money from your pension pot as and when you need it. But IHT only applies to pensions in very rare circumstances, so it can make sense to draw on other savings or investments (which are subject to IHT) to provide you with an income first. The exception to this is the 25% tax-free lump sum: it usually makes sense to draw this before reaching age 75. Talk to a professional financial adviser to make a plan that provides both for your retirement and for your heirs.

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