The government has hit a record-breaking year for inheritance tax (IHT) receipts as the latest data from HM Revenue and Customers (HMRC) reveals the taxman is set to collect £7.5 billion between April 2023 and March 2024.
That’s £400 million more in IHT receipts compared to a year ago, as frozen thresholds are dragging more estates into paying the tax. The tax year 2022/23 marked the last time IHT receipts hit an all-time high when it raked in £7.1 billion.
Research by Savills also shows those aged above 65 years old have around £2.6 trillion of wealth in their homes which the next couple of generations are set to inherit.
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This could see IHT receipts reach £9.7 billion by 2028/29 according to the Office for Budget Responsibility, but there are things to do to protect your estate and reduce your IHT bill.
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Laura Hayward, tax partner at wealth management firm Evelyn Partners said: “With no end to the freeze in nil-rate bands in sight there will be an escalation in IHT liabilities, if rules remain the same – not least because there is a massive transfer of wealth in the offing in the next couple of decades.”
There have been calls for IHT to be scrapped, but so far we have seen nothing from the government. While there were rumours, no reforms were announced in the Spring Budget in March.
Nicholas Hyett, investment manager at Wealth Club, argued abolishing the tax could have a greater impact on the economy. “In the last six months the government has faced increasing calls to abolish the tax altogether, or at least to introduce radical reforms. Abolishing inheritance tax has been linked with a decline in the number of businesses relocating overseas, and an increase in the number of wealthy individuals choosing to move to the country.”
Frozen IHT thresholds
The IHT threshold refers to the amount after which you pay IHT on your assets. Currently, the threshold is £325,000 which has remained since 2009, and is frozen until 2028. So, if your estate is valued at £400,000, up to £325,000 is tax-free, and then IHT is charged at 40% on the remaining £75,000.
This is pulling more estates into paying the tax as wages are increasing and rising house prices continue to increase the value of properties, prompting the question will house prices fall in 2024?
Hayward from Evelyn Partners says: “Even without an exceptional transfer of wealth, more estates and more assets in each liable estate are being dragged over the threshold at which IHT kicks in as the value of financial assets and property increases.
“The modest property downturn of the last year or so, which missed some parts of the UK entirely, seems to be over - so with the residential nil-rate band also frozen at £175,000, the trend of families or individuals with modest levels of wealth mostly held in property being subject to this 40% tax will continue.”
Stephen Lowe, group communications director at retirement specialist Just Group advises taxpayers to check if they fall into the IHT bracket. Lowe said: “A good way to start is to assess the entire value of their estate, including an up-to-date valuation of their property.
“Professional, regulated advice can help people work out the total value of their estate, calculate how much tax they may be likely to owe and understand what options they have to manage their potential tax liability.”
How to reduce your IHT bill
If your estate could be subject to IHT, then there are some things you can do now to protect your family’s inheritance by reducing your IHT bill.
- Make use of the gift allowance. You get a £3,000 gift allowance every tax year to give to a loved one without the burden of IHT. And the good news is, if you don’t make use of all your allowance in a given tax year, you can roll it over to the following year - but you can only do this once. Plus, you must live for at least 7 years after gifting for it not to be subject to IHT, so if you are planning on gifting money, then the sooner you do it the better, but just be sure you are still able to maintain a comfortable lifestyle.
- Add to your pension pot. Personal pensions aren't usually subject to IHT. Even though your pension is there to save for retirement, you can nominate a beneficiary to inherit your pension if you pass away before you can access it. You will need to do this via your pension provider.
- Make a will. Through your will, you can manage how and who your assets are distributed to. If you don't make a will, under the intestacy rule your assets will be distributed by the government and this could result in you paying more tax.
- Invest in AIM shares. Investors can access smaller companies on the London Stock Exchange through AIM. Some AIM shares are exempt from IHT, but you must hold the stocks for a minimum of two years to qualify.
- Donate to charity. You can get a 4% discount on your IHT rate on the whole of your estate if you donate a minimum of 10% of your estate to charity. You can check how much you would qualify for using the government calculator.
