Inheritance tax receipts jumped to £0.5 billion in April 2022 according to data released by HMRC today. This is £10 million higher than in the same period last year.
The freeze on the inheritance thresholds until 2026, high inflation and rising property prices mean that more and more estates are being pushed above the threshold.
There is a tax-free inheritance allowance called the nil-rate band that applies to everyone. Each person can pass on up to £325,000 of their estate without them having to pay any IHT.
Anything above £325,000 could be subject to up to 40% inheritance tax. The nil-rate band has stayed at the same level since April 2011, even though inflation has risen 43% over this time and the average house price has increased 66%.
Some homeowners can also benefit from a ‘residence nil-rate band’ of up to £175,000 on top of the nil-rate band. This, however, only applies when you pass on your main residence to a direct descendant.
The ‘residence nil-rate band’ was introduced in 2017 and has increased annually with inflation until last year, when the Chancellor announced it will be frozen until 2026.
Alex Davies, CEO and Founder of Wealth Club said, “Inheritance tax really is the gift that keeps on giving – to the Treasury at least. With the pace of property price growth still at nearly 10%, it’s no wonder so many more households are being pushed over the IHT threshold. It’s now believed that the average family impacted by inheritance tax will face an average tax bill of £200,000.
There are perfectly legal and legitimate ways to reduce your inheritance liability with a little careful and early tax planning. Writing a will so that you are forced to consider and address the issues your estate might face, and keeping it regularly updated to reflect any changes in heart or circumstances should be a priority for everyone, married or not.
Give money away early. Gifts taken out of regular income, which are not deemed to affect the giver’s standard of living, are inheritance tax free on day one – as are certain smaller gifts. Timing is key as you can give unlimited amounts away but typically these take seven years to be completely inheritance tax free. Of course, once you give away the money you have lost control. If you need it back for an emergency, that’s not an option.
Invest in companies that qualify for Business Property Relief. These are typically inheritance tax free after two years. Investing in unquoted businesses can be risky, however, unlike giving the money away, you retain control.
Invest in an AIM ISA. ISAs are not inheritance tax free. When you pass away, your loved ones could miss out on 40% of your hard-earned cash. AIM ISAs are a popular way around this. They are riskier but after two years they could be IHT free.
Unmarried couples’ homes could be subject to inheritance tax when one partner dies and any tax liability would be due within six months, forcing many to sell their home while grieving. Cohabitants need to put real thought into how they address this problem. While marriage isn’t for everyone it can offer significant tax advantages and married couples can leave everything to their surviving spouse without them having to pay inheritance tax.
And finally, whatever you do, make sure you make a will. If you don’t, the law will decide how your estate is distributed and it certainly won’t be the most tax efficient way.”