HMRC has announced record receipts from inheritance tax (IHT) during the period April 2021 to March 2022 – a total of £6.1 billion, nearly a 13% increase on the same period a year earlier.
Receipts are likely to continue to rise for the foreseeable future due to the freeze on IHT thresholds until 2026, rising inflation, and continuing increases in property prices bringing an increasing number of estates above the threshold.
The Office for Budget Responsibility estimates that IHT receipts will increase by a further 36% to £8.3bn by 2026/27 and more individuals will be caught by IHT in the coming years.
What can be done?
The most important step that individuals can take is to review their assets, consider what lifetime planning is appropriate, review the structure of their wills, and take appropriate advice on with tailored planning to their own circumstances. The UK IHT system offers a few ways that may prevent individuals from suffering large IHT liabilities on death, some of the key options and reliefs include the following:
- Transferable nil rate band – where a married couple leave everything to each other in their wills it is now, not only exempt from IHT but it means they have not used their own nil rate band and it can be transferred to their surviving spouse or civil partner., it may be possible to claim a total nil rate band allowance of up to £650,000.
- Residence nil rate band – this acts as a top-up to the current IHT NRB (2021/22 – £325,000) and works in a similar manner by reducing the value of your estate that is subject to IHT at the full rate of 40%, and at the current rate gives each person an extra IHT free allowance of £175,000, provided that certain conditions regarding how their main residence is inherited are met. In particular, this only applies in full if your estate is under £2m on death. This allowance can also be ‘inherited’ between spouses, giving a maximum of £350,000 per couple
- Downsizing allowance – this allows the residence nil rate band allowance to be claimed in certain circumstances where the person who has died downsized (reducing the value of their property) or moved into a care home before their death.
- Business property relief – ownership of part of a trading business, or shares in certain unlisted companies, may qualify for 100% relief from IHT, but they must have been owned for at least two years before death.
- Gifting assets – making a gift to your family and friends while you’re alive can be a good way to reduce the value of your estate for IHT purposes and benefit your loved ones immediately, for capital gifts you must survive for at least 7 years after gifting to avoid the IHT.
- Gifting income – making regular gifts from your surplus income takes those funds immediately out of IHT and can be a valuable way of stopping your estate increasing in value.
Even after death, it can be possible to mitigate IHT by entering into a Deed of Variation (within two years of death), a legal tool which can be used by any adult beneficiary, regardless of whether an inheritance is left in a will or through intestacy, family members should be aware of this and take early advice during the estate administration process.
What next?
Careful advanced planning and structuring of your estate can not only help to reduce your tax liabilities, but ensure that you and your family’s financial future is safeguarded. To discuss your estate planning needs in more detail please contact PM+M Managing Partner Jane Parry using the button below.