The UK tax system is a highly complicated – full of allowances and exemptions, some more unusual than others. When it comes to Inheritance Tax (IHT) there are thankfully a range of tools which can be used to help reduce this hefty tax. Claire Spinks, our Head of Tax Technical and Development, looks at some of the more surprising loopholes.
When it comes to UK tax, IHT is the big hitter. Standing at a flat rate of 40%, it’s a scheme which many families are keen to prepare for, to help lessen the blow. Thankfully a raft of exemptions and allowances can help. Most of these are well known including the £325,000 individual allowance, Main Residence Nil Rate Band and permitted annual gifts. But a few more – although niche – might offer some help in certain circumstances.
Armed forces
A lesser-known relief is that IHT isn’t charged on Estates belonging to members of the armed forces who die in active service. The exemption has some caveats, and also applies if an injury or illness sustained in the line of duty later causes death. In these situations, the onus is on family members to prove and supply evidence, but it can still be a worthwhile exercise to help reduce or eliminate IHT.
Military medals
Military medals can be valuable in a couple of senses – both as a treasured family heirloom and an asset in their own right. These items can fetch significant sums of up to seven figures; the first Victoria Cross awarded to a citizen sold for almost £1 million in 2022. So, it’s easy to see that family medals – especially if your relatives were highly decorated – could quickly push their Estate into the IHT net. Thankfully medals are exempt when it comes to calculating IHT. The exclusion applies to any medals and decorations which have been awarded by the Crown that have never been disposed of for money or money’s worth – or other countries – to those serving in the armed forces or emergency services sector, or to individuals recognised for their contributions to public life. There are exceptions; Olympic medals don’t have the same honour but other items, such as swords or silverware awarded for bravery, do.
Emergency services
In an extension to the armed forces exemption, since 2015 ‘blue light workers’ who die responding to emergency circumstances also have their Estates protected from IHT. Further reform came during the pandemic when NHS workers who died after developing coronavirus whilst working on the frontline were also exempt.
Overseas armed forces
Overseas armed forces who are temporarily stationed in Britain can avoid Inheritance Tax. Whilst this might seem an unnecessary exemption, it’s not unusual for visiting forces to be based in the UK for a number of years, meaning they could fall into the IHT net. The same freedom is also available for visiting diplomats in the UK.
Property, art or collections of national importance
Items which have national or historic significance can be excluded when it comes to calculating an Estate’s IHT. Some areas of land – as long as they are classed as ‘outstanding natural beauty’ – also qualify. Any items are scrupulously inspected by the government under its Cultural Gifts Scheme along with experts from heritage organisations such as the Arts Council or Historic England. There are some limitations and you’ll either need to carefully look after the item and make it accessible to the general public, or donate it to a museum or gallery in lieu of IHT.
Sports clubs
Certain sports clubs – known as Community Amateur Sports Clubs – can receive donations free from IHT. This can help reduce the value of an Estate and support a good cause. A simple web search can produce a list of qualifying clubs.
Political parties
As well as charities and some sports clubs, any donations to qualifying political parties are exempt from IHT. Interestingly you can also leave property to political parties free from IHT, as the last Earl of Stanhope did with Chevening House, his country estate in 1959.
Chevening Estate and Apsley House
These properties are an excellent illustration of some of the minutiae – and absurdities – of the UK tax system. Chevening House is a ‘grace and favour’ country house traditionally used by the government (usually the foreign secretary) and Apsley House is a Grade 1 listed London townhouse – half of the property is lived in by the Duke of Wellington and his family. Both are exempt from IHT.
To discuss any aspect of your tax planning, including IHT, please contact your nearest office.
