Ever more families are facing inheritance tax (IHT) bills as frozen thresholds push more estates into liability.
HMRC took £1.5 billion in IHT receipts in the first two months of the current tax year, according to its latest data.
This is an uptick of just under £100 million on the comparative period last year (a rise of 7%) and marks another consecutive increase for the Government from the duty, which taxes the value of estates that fall outside of protected allowances.
Rises are being followed closely, particularly as pensions are set to be factored into estate calculations from 2027 – which could send HMRC’s receipts soaring even higher.
Why does IHT tax keep rising?
IHT is a tax on the value of your estate when you die. It comes with a variety of rules and allowances which all factor into what your family may finally pay when your estate passes down.
Although various thresholds exist, the basic £325,000 one has not changed since April 2009.
This means the Government has benefited from 16 years of ‘fiscal drag’ on the allowance.
As individual estates and wealth rise in value in line with inflation, more and more have tipped over the limit levels. This means steadily over time the Government has been able to earn more from IHT without actually changing its own rates.
How to mitigate IHT
The introduction of pensions into IHT calculations from 2027 is a significant issue for families hoping to minimise their IHT liability.
There are fortunately ways to mitigate IHT, through the use of allowances, gifting and other thresholds. But it requires careful financial planning to get right and ensure you don’t fall foul of the rules.
Beyond the basic £325,000 Nil Rate Band is the Residential Nil Rate Band. This is currently set at £175,000. This means the first £175,000-worth of your primary residence is outside of IHT calculations.
These allowances can be combined for your home if the value exceeds the total amount of £500,000 for individuals or £1 million for couples. But consideration still needs to be made for other assets too.
If you are married, then these two allowances are combined with your partner. This means up to £1 million of your joint estate is potentially not liable for IHT.
This is because there is no liability on the death of the first married partner. The combined allowances are used to calculate liability once both have passed away.
Beyond these basic allowances are a series of gifting rules such as annual gifts and the so-called ‘seven-year rule’ – which exempts gifts of any value from IHT, but only if you live for seven years after the gift was made.
It is essential to take advantage of these rules to minimise liabilities. But also critical is making a plan for how to do so in the most efficient manner possible.
At the end of the day it is not just the tax liability your estate has; it is making sure your retirement plans are not compromised by changes you make to try and minimise the tax bill. A financial planner can help ensure the best outcome possible on both issues.
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