Another Bumper Month For IHT

It’s been a bumper month again for HMRC as far as inheritance tax (IHT) goes. Receipts totalled £500m in April, £10m higher than the same period a year ago and the highest sum collected in the first month of the tax year in the last five years.

IHT receipts increased in the last tax year to £6.1bn and it's likely this figure will only continue to rise as house prices continue to climb overall, coupled with the government’s decision in March 2021 to maintain the IHT nil rate band thresholds at their 2020/21 levels up to and including 2025/26.

This freezing of the thresholds will pull many unsuspecting families into this tax, one that was originally supposed to be a tax on the wealthy.

The average UK house is only £50,000 short of the threshold, and the Office for National Statistics doesn’t see this trend reversing. It predicts that by 2026-27, inheritance tax will raise £7.6bn a year.

So it’s a good time to revisit the ways to reduce the burden – and how to avoid the pitfalls.

For a fuller picture on how to plan for IHT, visit my earlier article, An Introductory Guide To IHT, here.

For those after a shorter read, here is a reminder.

Inheritance tax on death is charged at 40% on anything over your tax-free allowance of £325,000 – and if you don’t entirely use that allowance, the remaining balance can be transferred to your surviving spouse or civil partner – potentially taking their allowance to £650,000.

Your family home qualifies for a further discount if your total estate is under £2.35 million, when there’s up to an additional £175,000 tax-free when passing on your house to your children or later grandchildren.

As before, any balance is also transferable to a surviving spouse if not used up on your death.

But there are a few ways you can make sure to pass on as much as possible:

The seven-year rule: You can make outright gifts of any value tax-free, provided it’s at least seven years before your death. The rate starts to fall three years after the gift is made and drops gradually to zero over the following four.

Normal expenditure out of income: If it is an option, you can make regular gifts out of your surplus income, tax-free. Regularity is important, but the amounts given do not have to be the same each year, and there is no limit on their value. But it’s worth noting that for the exemption to apply, gifts must not adversely affect your standard of living.

The £3k-a-year rule: Each tax year, you can make one or more tax-free gifts up to a limit of £3,000 in total. Any unused allowance may be carried into the next tax year. Don’t be fooled into thinking this is a limit however, see my article on gifting here.

Give to charity: If you leave 10% or more of your estate to charity in your will, the IHT rate applied to the rest of your estate will be reduced from 40% to 36%. Alongside that, the value of the charitable gifts themselves will be deducted before IHT is charged.

APR, BPR and woodlands relief: If you have agricultural property or woodlands, you may qualify for full or partial tax relief under APR (Agricultural Property Relief). Similarly, for those that own a share of a business or private trading company, whether AIM-listed or otherwise, BPR (Business Property Relief) may be available (see this month’s main article here).

Life insurance: There are many reasons to take out life insurance, but one extra benefit is that it could help pay your IHT bill on your death. It doesn’t reduce your overall bill, but it can help your family fund the remainder.

Smaller gifting allowances: There are other more modest exemptions available, such as one for small gifts made to any one person not exceeding £250 (provided they have not benefitted from the £3,000 annual allowance). Wedding gifts may also be made tax-free. The limits are between £1,000 and £5,000 depending on your relationship with the recipient.

If you want a personalised report summarising your current IHT liability together with some planning suggestions, please get in touch.