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More estates paying Inheritance Tax (IHT) than ever

After Inheritance Tax (IHT) receipts doubled between 2012–2022, the latest figures from HMRC revealed that 2023–2024 is on track to become another record-breaking year for IHT revenue.

In 2022–2023, the Treasury raised £7.1 billion from IHT receipts, and based on figures from this April–May being up 9.1% (£1.2 billion) on the previous year, this is likely to rise again to £7.7 billion for the current financial year.

The Office for Budget Responsibility (OBR) predicted that annual IHT bills will only raise £7.2 billion this year and reach £8.4 billion by 2027–2028, but the early data suggests that the Treasury’s takings will surpass the official forecasts.

This is likely due to the ongoing nil-rate band (NRB) threshold freeze – fixing the tax-free IHT allowance at £325,000 until
– combined with increasing property values.

With more estates being dragged into the IHT net, the average bill is now almost £62,000, with even larger amounts due for estates that include property in London or South East England.

Here’s a summary of what’s happening with IHT, and what you can do to minimise your estate’s Inheritance Tax liability and leave as much as possible to your loved ones.

Why are more people paying IHT?

Inheritance Tax is levied by the UK government on the estate of a deceased person. Their estate includes all of the deceased’s assets – not just property, but also personal possessions (e.g. vehicles, jewellery, artworks), investments, and some lifetime gifts.

If the total value of their assets does not exceed the nil-rate band (NRB), no tax will be levied. If the estate is worth more than the NRB threshold, which has stayed at £325,000 since 2009, the inheritors will be taxed 40% on the excess value.

The residence nil rate band (RNRB) was implemented in 2017 to increase the allowance for main residences passed onto a direct descendant. At £175,000, this boosts the tax-free value to £500,000 for spouses, children, or grandchildren inheriting a residence.

As the RNRB applies per person, the allowance for a married couple would increase to £350,000. Any unused NRB is also transferable to the deceased’s spouse, meaning married couples can potentially pass on property worth up to £1 million with no IHT due.

These allowances may seem generous initially, but the NRB
has not changed since it was it introduced. With the freeze lasting until 2028, this threshold will have been the same for almost 20 years, while asset values have continued to rise.

The average UK property value has risen by 86% since 2009
– despite property prices fluctuating recently, the average detached house increased in value by £20,000 from March 2022–March 2023. With the average price of a detached house being £454,000 (closer to £525,000
in London), a typical estate could now be worth almost £480,000.

If the RNRB doesn’t apply, the IHT bill for such an estate would be around £62,000, whereas no IHT would have been due if the NRB had been updated to keep pace with inflation.

How can you reduce IHT?

Now that a tax initially targeting the wealthy is affecting average families, it’s even more important to plan your estate and manage taxes carefully. There are several things you can do to reduce your IHT
liability and keep your estate value within the taxable threshold.

For example, if your entire estate is valued below £2 million and your main residence is worth £500,000 or less, you could pass your home directly to your widowed spouse, children, or grandchildren without them having to pay tax on the residence.

You may decide to share your assets with family members during your lifetime, whether in the form of regular payments or gifts worth up to £3,000 a year. Wedding gifts to children or grandchildren (up to £5,000
or £2,500 respectively) can also be exempt from tax. You can give unlimited gifts of up to £250 to anyone else who hasn’t already received one, too.

However, you must be wary of the fact that IHT can still be charged on these gifts if you pass away within 7 years of giving them. This will be levied on a tapering scale, but if you pass away within 3 years of giving the gifts, the full 40% will be charged.

You could also choose to donate a portion of your estate to a charitable organisation. If you leave 10% or more to a charity or community (sports) club, this will trigger a 4% discount on IHT. So, if your estate value is still above the threshold after deducting the charitable donation, the excess will be taxed at 36% instead of 40%.

Other options include setting up trusts for relatives, or transferring ownership of assets such as a property or business while you’re still alive – but ‘gift with reservation’ tax rules may apply.

Financial planning for IHT

High house prices and frozen tax bands are sure to push more estates over the IHT threshold in the coming years, so people shouldn’t risk leaving IHT planning too late if they want to protect their estate and reduce the tax burden for their heirs.

You can read through HMRC’s Inheritance Tax guide
online to learn more about IHT exemptions, but remember there are risks in attempting to reduce your tax liabilities by yourself. It’s such a complex area that it’s easy to fall foul of the rules, and mistakes can be costly.

If you’re serious about financial planning, it’s best to get professional guidance from a financial adviser. At gbac, our accountants in Barnsley
can help individuals and families evaluate their financial positions and plan for their futures.

This includes helping with estate valuation, gift giving, placing assets in trust, and minimising liability for income taxes and Capital Gains Tax (CGT) as well as IHT. We can regularly review your finances and identify ways to help you meet your goals.

To learn more and get started with IHT financial planning, call us on 01226 298 298, or send an email to info@gbac.co.uk and we’ll be in touch soon.