Some of the UK’s largest estates are paying half the effective inheritance tax (IHT) rate of estates a third their size, a freedom of information (FOI) request has revealed.
The FOI request, which was made by Canada Life, suggested estates worth £10m or more paid an average of 10% IHT – and thus half the average rate of 20% paid by estates worth between £2m and £3m. Data published for the 2015/16 tax year meanwhile showed estates worth between £6m and £7m had the highest average effective IHT tax rate at 21%.
According to Canada Life, these figures show “great inconsistencies” in the way different assets are taxed for inheritance purposes, which leads to similarly sized estates paying “wildly different” rates of tax.
The main reason for this, Canada Life explained, is the different asset composition for estates of different sizes. As an example, it said larger estates typically had a much smaller percentage of their value in UK residential property (10%), which do not have high levels of tax-efficient exemption and a much higher amount in securities (40%), which can attract 100% tax relief.
‘Willingness to plan’
Canada Life wealth management and tax specialist Neil Jones said it was often a “willingness to plan” that caused the difference in the net tax rates paid by estates, as opposed to the value of an estate or the different type of assets it held.
“There are myriad 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,” he added.
“There is also a more fundamental issue of being willing to create an estate planning strategy. It is still somewhat taboo to talk about death and certainly many clients, and even advisers, find it difficult to introduce it – but it needs to be talked about. It has been said the majority of wealthy families lose their wealth within a generation and avoiding that trap means clients planning for the future.”
Hear from Canada Life’s Andrew Tulley and other expert speakers at the Retirement Planner Forum in London on 14 June. Find out more or book your place here