This tax wastage is only set to increase further in the future after the chancellor announced in 2010 that the threshold would remain frozen for four years at £325,000 rather than rising in line with inflation.
Inheritance tax is not only Britain's second biggest tax wastage area but it also holds the fifth place in the list of taxes Britons most want to abolish (after fuel duty, council tax, TV licence fee and income tax). Despite this, almost nine out of ten (88%) people state they have done nothing in the past 12 months to reduce the amount of tax they pay.
Overall, Britain is set to waste £13.5 billion in unnecessary tax payments this year, with IHT making up 10% of the tax waste mountain on its own, the second largest area of waste. The number one area of tax wastage is through tax credits, with over £8.5 billion being lost through people failing to claim their child benefit, child tax credits, working tax credits and pension credits.
Unbiased.co.uk also found that more than a quarter (28%) of people do not know how to go about being more tax efficient. Unbiased.co.uk's annual Tax Action campaign aims to encourage people to think sensibly about their tax liabilities and to take proactive steps to avoid unnecessary tax payments. One of the biggest and most widespread causes of ‘death tax' wastage is inclusion of proceeds of life assurance policies in personal estates which, if written in trust, would not be subject to IHT. Inheritance tax planning can prevent vast amounts going unnecessarily to the taxman and will instead go to your benefactor of choice.
Karen Barrett, chief executive of unbiased.co.uk commented, "Our 2011 Tax Action Report reveals that vast sums are being paid unnecessarily in inheritance tax every year because the deceased had not made adequate provision. Such situations can only bring additional unwelcome stress for the deceased's family at an already difficult time, as the tax must be paid before the estate can be released and any inheritances can be passed on.
"With the IHT threshold frozen for another three years, it is important to make sure your financial affairs are in order to protect your family and loved ones after you have gone. The easiest way to ensure that your financial arrangements are as tax efficient as possible, and to check that you will not be over paying taxes such as IHT, is to visit an independent financial adviser.”
Julie Hutchison, head of estate planning at Standard Life, agrees. She said: "The results from this Tax Action Report tie-in with recent research by Standard Life. A key reason for IHT arising is through lack of awareness of the IHT exemptions which exist. Almost half (46%) of people in our report were unaware of the IHT exemption for regular gifts from surplus income, and 45% unaware of the transferable nil rate band. Working with a financial adviser can help people find a solution which best suits them."
