4 May 2016
Author: Stephen Breen
Many of the great literary heroines and heroes inherited vast fortunes which would have attracted a substantial inheritance tax bill today. Ruth Emery for The Sunday Times (1st May) has calculated exactly how much the taxman would have taken from the inheritance of five of our literary favourites, had they existed in modern times.
Inheritance tax is charged at 40% on any part of your estate over £325,000. This lucrative revenue stream has made £1.6bn for the Treasury in the first three months of 2016 alone – £685 million more than Jan – Mar five years ago. Where a large estate is at stake, it can be surprising just how much can be lost to this hated tax.
Charlotte Brontë’s character Jane Eyre inherits £20,000 from her Uncle which would be worth £1,871,560 in today’s terms. If we assume this was the total value of her Uncle’s estate, inheritance tax would be due at £618,624 (40% of the balance over £325,000), leaving Jane with £1,252,936. The tax becomes due by the end of the sixth month following the person’s death – so if Jane’s Uncle died in January she would have to settle up by the end of July.
Mr Bennet is a character in Jane Austen’s Pride and Prejudice and in the novel, he owns the Longbourn Estate. Having five daughters and no male heir, he selects his distant cousin Mr Collins to inherit Longbourn. As a consequence, Mr Bennet’s wife and children have no legal right to remain on the estate following his death.
Mr Bennet also plans to leave £5,000 in ‘marriage articles’ to his wife, but this is insufficient to support his wife and daughters in the long term (hence her obsession with marrying off their five daughters).
If Mr Bennet were alive today, he could have left his entire estate to his wife, free from inheritance tax. This is a result of the spouse exemption which allows husbands, wives and civil partners to leave everything to each other free from the tax. However, if Mr Bennet had left the whole estate to his daughters, 40% would be payable on the value over £325,000.
The Sunday Times estimates the property might be worth £1 million in today’s money. The £5,000 in marriage articles would be worth £312,883 today, taking the total value of the estate to £1,312,883. On Mr Bennet’s death, Mrs Bennet would inherit his unused £325,000 IHT allowance, giving her a total allowance of £650,000. On her death, a tax bill of £265,153 (40% of £662,883) would be payable by her daughters. Since the main value of the estate is in the property itself, the daughters would likely have to sell the estate to cover the tax bill.
However, it is possible to pay an inheritance tax bill over ten years if the property is not sold. Interest is payable if this option is taken at the rate of 3% (liable to change).
Pip in Great Expectations is paid £500 a year by an unknown benefactor. He believes the funds must have been paid by Miss Havisham but in fact they are from Magwitch, an escaped convict that Pip assisted when he was younger.
In today’s money, each £500 gift would be worth £52,000. Provided that Magwitch survives for seven years following each gift, no inheritance tax is payable. If he dies between three and seven years after making the gift, inheritance tax becomes payable on a sliding scale. For deaths within 3 to 4 years, 32% IHT is payable. From 4 to 5 years, 24% is payable. This drops to 16% from 5 to 6 years and 8% from 6 to 7 years. It is also possible to give up to £3,000 each year free from IHT, regardless of when you die.
If Magwitch made three payments of £500 within three years of his death, these would be worth £156,000. Deducting the annual £3,000 exemption for each of the three years, this would add £147,000 to Magwitch’s estate upon death. If his total estate was worth more than £325,000, £58,800 in inheritance tax (40% of £147,000) would be due on the gifts made to Pip.
Jane Austen’s character Henry Dashwood in Sense and Sensibility leaves his home to John, the son of his first wife – with the intention that John would support Henry’s second wife and three daughters.
Unfortunately John does not comply with Henry’s wishes. The wife and daughters are made to leave the estate and forced to live on an annual income of £500, plus £7,000 of inheritance.
If they were alive today, the £500 annual payments would be worth £36,429 – not a huge budget for the four of them, especially considering their position in society. In addition, the £7,000 inheritance would be worth £510,000 now.
If Henry had divided the estate between his four children under the current rules, it would be subject to IHT on the value over £325,000. However, from April 2017 this threshold increases to £425,000 for those leaving a family home to children or grandchildren. Further increases to the limit are planned, taking it to £450,000 in 2018 – 2019, £475,000 in 2019 – 2020 and finally £500,000 in 2020 – 2021. This means that from April 2020 parents can leave their home and assets up to the value of £1 million free from inheritance tax.
Well known and loved character Harry Potter from JK Rowling’s books was left stacks of galleons (wizarding coins) by his dead parents. In a later book, he inherits his godfather Sirius Black’s estate.
Although we don’t know the value of a galleon, the Sunday Times speculates that they could be worth £2 million now, with Sirius Black’s estate worth a further £1 million. As Harry’s parents both died at the same time, their IHT allowances (jointly £650,000) would be unused and transferred to Harry as their beneficiary. Their £2 million estate would be subject to £540,000 inheritance tax (£2 million minus £650,000 allowances, multiplied by 40%).
As Sirius Black wasn’t married, his IHT allowance would be £325,000, leaving Harry with a further IHT bill of £270,000 (£1 million minus £325,000, multiplied by 40%).
Ruth Emery’s article is a highly entertaining way of looking at today’s inheritance tax rules. In many cases, the characters, if they were alive today, could have avoided the substantial inheritance tax liability on their estate through a number of means. Get in touch with our later life planning team and find out about the different ways you can legally reduce the amount of inheritance tax payable on your own estate.