Classic cars, jewellery and handbags – How high luxury is accounted for in Inheritance Tax
Inheritance Tax (IHT) is paid on all items of your estate after you pass away if you exceed certain thresholds.
Whilst many people focus on their savings, properties and investments, the items you own, commonly referred to as personal chattels, are also included in the calculation of the estate’s value.
There has been a growing trend in recent years for people to invest in luxury goods, including cars, watches, jewellery and handbags, instead of or alongside more mainstream forms of investments, like stocks and shares.
However, many may not realise the impact that this has on their own estate, especially if the value of these assets increases significantly.
What is Inheritance Tax?
Often referred to as a “death tax” by the press, IHT is a tax on the estate, money, property and possessions of someone who has passed away.
In the UK, the standard tax-free threshold, known as the Nil-Rate Band (NRB), provides each individual with £325,000 of IHT-free assets.
On top of this, homeowners benefit from the Residence Nil-Rate Band (RNRB), which is a further £175,000 allowance if you leave your main home to a direct descendant, such as a child or grandchild.
Subject to other tax reliefs, such as Business Property Relief or Agricultural Property Relief, everything above these thresholds is taxed at a rate of 40 per cent.
A spouse can transfer any unused NRB or RNRB to the surviving spouse, which means a couple can pass on up to £1 million tax-free under the right circumstances.
As mentioned, all assets in the estate are included in your IHT calculations. This includes any classic cars, jewellery and handbags.
Unlike Capital Gains Tax, there is no general low-value exemption for personal chattels under IHT, so even modest items can form part of the estate’s overall value.
Are there ways to protect my luxury collections from Inheritance Tax?
There is a possibility that IHT could be waived on luxury collections if you are willing to part with them at least seven years before you die, thanks to the seven-year gifting rule.
This means providing clear evidence that the asset was passed on. Whilst you may be able to admire your collection from afar, you won’t be able to continue to personally possess it.
Gifted assets must be kept with the individual to whom they were gifted, as holding onto them causes them to be known as a gift with reservation of benefit and does not limit IHT exposure.
In some circumstances, you can pay a market-rate rent to use the items after making the gift, though this must be regularly reviewed to remain at market value. This approach requires careful consideration and advice.
Seeking expert support is always wise when planning your estate, regardless of how you intend to reduce IHT exposure.
