News and views from Lane-Smith & Shindler

It is apparent that an early casualty of the Conservatives’ coalition deal with the Liberal Democrats has been their manifesto pledge to increase the inheritance tax allowance (or ‘nil-rate band’) to £1m.

The pledge was originally made in 2007 when the world was a very different place.  More recently, the pledge has been used by the Conservatives’ opponents to make them look out of touch with ordinary people.  An individual allowance of £1m equates to a joint allowance for married couples of £2m.  During the election debates Gordon Brown made reference more than once to the Conservatives being more interested in helping ‘double millionaires’ than ordinary families.  There may be a suspicion therefore that the Conservatives were not entirely unhappy about dropping the proposal.

The inheritance tax allowance is currently set at £325,000 (equivalent to a joint allowance of £650,000 for married couples and civil partners).  In his last Budget before the election, Alistair Darling indicated that there would be no increase in the allowance until 6 April 2015.  Clearly, that may change but the best that can probably be hoped for over the next five years is a small annual increase in line with inflation. 

After deducting the nil-rate band, inheritance tax is levied at a flat rate of 40% so the amount due quickly adds up.  A married couple with joint assets worth £1m face an inheritance tax liability (payable on the death of the second person to die) of £140,000.  A married couple with joint assets of £2m face a liability of £540,000.

Roy Jenkins once famously described inheritance tax as a “voluntary tax”.  That may be an over-simplification, however inheritance tax is certainly easier to avoid than other taxes provided you don’t leave it too late.  There is anecdotal evidence that the prospect of a significant increase in the nil-rate band has caused some moderately well-off people to defer steps that they might otherwise have taken to reduce their inheritance tax liability.  The position now is much clearer.  Waiting and ‘hoping for the best’ is no longer a sensible option and people who have put off making the necessary arrangements need to press ahead now without further delay.