Inheritance tax – then and now

Gary Adams's picture

Looking out of the office window, summer may have finally arrived (although this statement is subject to change at any time), which means it’s time to read a decent book in the garden.

In this spirit, Moneywise and IFA review site VouchedFor have teamed up to uncover how Britain’s literary characters would fare in George Osborne’s Britain. It seems inheritance planning is a key theme – highlighting the importance of planning and of having an up to date will and Lasting Power of Attorney in place.

Inheritance tax (IHT) is currently paid if a person’s estate - their property, money and possessions - is worth more than £325,000 when they die. The rate of IHT is 40% on anything above the threshold, although the rate may be reduced to 36% if 10% or more of the estate is left to charity.

Alex Whitson, chief marketing officer for VouchedFor says: “Times have changed since Georgian Britain yet inheritance distribution remains a large concern for many Britons. As property prices continue to grow, more people are affected by inheritance tax. But inheritance tax is largely avoidable if the right plans are implemented early enough.”

To demonstrate, we’ve picked a few old favourites and thrust them into the modern world.

Jane Eyre by Charlotte Bronte

In Jane Eyre, which was first published in 1847, the young orphan from whom the novel takes its name inherits £20,000, which is equal to £1,871,560 today. But in 2016, Jane would have to pay IHT of £618,624, leaving her with £1,252,936.

You may also remember that Jane gave £15,000 away to her cousins, the Rivers. If she did this today, she could enlist the help of a discretionary trust, which would allow her to remain in control of how the money is spent and to whom it goes to.

Additionally, because the money would no longer be part of Jane’s estate, it would have less exposure to IHT, though of course it would be subject to other taxes, including capital gains tax (CGT) in the event of asset removal from the trust and income tax on any earnings.

Pride and Prejudice by Jane Austen

Think back to your GCSEs, or even O Levels, and you may recall that this story is all about Mrs Bennet looking to marry off her five daughters so that they can avoid financial destitution in the future.

This is because, despite owning an estate with her husband Mr Bennet, the lack of any male descendant would mean that a cousin, one Mr Collins, would be heir to the family’s wealth and the women of the family would have no legal right to stay in the house. Mr Bennet also planned to leave £5,000 in ‘marriage articles’ to Mrs Bennet and his daughters in the event of his death, which based on its value in the year of publication (1813) is equal to £312,883 in today’s money.

If they had lived in 2016, Mrs Bennet and the daughters would get the estate, as long as her husband’s will was in order. But while the property would go to Mrs Bennet tax-free, assuming the property would be worth £1m, (which seems conservative when looking at house prices today), with the marriage settlement taken into account, the family would be left with an IHT bill of £395,153.

The conclusion here is that the Bennets would be forced into selling their estate in order to raise sufficient money for the IHT bill.

Sense and Sensibility by Jane Austen

Laws regarding man and wife were very different in the distant days of 1811, when this book was first published. In the plot, Mr Dashwood cannot legally give his money or property to his wife and daughters, and instead gives it to his son on the promise that his heir will support the rest of the family. In a move that will surprise no one, this fails to happen.

Mrs Dashwood and her daughters must instead move out and survive on £500 a year plus the £7,000 she receives from her late husband. The former would be worth £36,429 today and the latter £510,000.

If this happened today, Mr Dashwood would, of course, be able to pass his wealth onto his children, who would each have to pay IHT at 40% on everything they received over £325,000, making for a total IHT bill of £74,000.