Margaret Thatcher’s Inheritance Tax Legacy
Friday, April 12, 2013
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One thing is certain, Mrs Thatcher was undoubtedly an indomitable lady, and will be remembered, amongst other things, as this country’s first female Prime Minister. Indeed as a child growing up at that time, I wondered whether only females held the role of Monarch and Prime Minister.
At this time of reflection, tax practitioners will also be aware that the Inheritance Tax Act 1984 came into force during her time in office. The inheritance tax (“IHT”) legislation replaced the previous Capital Transfer Tax rules, and for a very short period of time potentially exempt transfers could be made without the usual seven year run off period.
In 1986 an individual’s Nil Rate Band was £71,000, at a time when the “average” annual salary was £12,615 and the “average” house price was £36,000. The Nil Rate Band has increased over the years and is now £325,000 with the average annual salary thought to be £37,000 and the average house price in the region of £238,000.
It was never envisaged that so many households would fall within the IHT net on death, but the surge in house prices in the last two decades meant that more people are being caught by the IHT legislation.
Some steps have been taken by recent Governments to mitigate the impact of IHT. When the Conservative Party suggested that they might increase the IHT free threshold, the Labour Party responded in 2007 by introducing the concept of the Transferrable Nil Rate Band. The impact of this has been significant for married couples and civil partners. In the majority of cases, married couples/partners wish to leave their entire estate to the survivor. Previously, that meant that the Nil Rate Band of the predeceasing spouse/partner was lost on the first death (unless tax planning steps were included in the Wills). Now, if the entire estate passes to the surviving spouse/partner then, on the second death, two Nil Rate Bands may be available (£650,000).
Many of the other exemptions have remained in place, over the period, such as annual exemption (£3,000), potentially exempt transfers (unlimited amount) and the very valuable relief for gifts out of excess income, to mention just a few.
So, while change is inevitable, and the Government of the day tweaks the Inheritance Tax Act 1984 each Budget Day, Mrs Thatcher’s IHT legacy remains in place for us all to consider. And while death-bed, and post-death IHT planning are still considered sporting in terms of the current legislation, it is prudent to consider IHT planning during lifetime.