HMRC amassed a staggering £2billion in inheritance tax (IHT) receipts from April 2023 to June 2023, which is £0.2billion higher than in the same period a year earlier.
The nil-rate band, which is the amount a person can pass on after death tax-free, has been frozen at £325,000 since 2009. While inflation runs rampant and house prices remain high, an increasing number of families are being dragged into the tax bracket – but there are ways to “reduce” the burden.
Darran Harrison, wealth planner at Kingswood Group said: “The Chancellor announced in the 2021 budget that there are no plans to increase the IHT thresholds until April 2026 at the earliest, despite more estates being brought into scope on the back of rising inflation and soaring house prices.”
However, he noted: “Passing assets to loved ones or down the family tree is one way to reduce the value of an estate and therefore reduce the potential tax bill. There are a number of ways this can be done.”
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Use spouse and civil partner allowances and exemptions
Married couples and civil partners can make use of each other’s tax-free allowance without special tax planning.
Mr Harrison said: “This tax year, you can pass on £175,000 of your property tax-free, which is effectively doubled to £350,000 when combined with the allowance of your spouse or civil partner. That’s layered on top of your inheritance tax allowance – or nil rate band – of £325,000, meaning it is possible to pass on £1million inheritance free as a couple.
Gifts and transfers between married couples and civil partners living in the UK are also IHT-free. If the first partner to die leaves their entire estate to the other, no tax will be payable.
Mr Harrison said: “It’s also likely that none of their nil-rate band has been used, and the partner will be able to add the unused balance to their own, effectively doubling the threshold.”
However, he noted that if a partner is not UK-domiciled, limits can apply, and people should seek specialist advice.
Make annual gifts
Single gifts of £3,000 can be made completely free of inheritance tax per year. This can either be to one person or split between several people and the allowance can be carried forward one year if unused.
In addition, Mr Harrison said: “You are able to make small gifts of up to £250 per year. There is no limit to the number of recipients in one tax year and these small gifts will also be IHT-free, provided you have made no other gifts to that person during the tax year.
“Gifts in consideration of marriage or civil ceremony are another potential option, subject to limits according to who is making them.”
Regular gifts out of “normal expenditure” can also be made free from inheritance tax, but these are subject to specific affordability tests and qualifying criteria. For example, gifts must be made from excess income and not savings, should not impact the person’s standard of living, and should form a regular pattern, for example monthly or annually.
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Make lifetime gifts
People can also make larger gifts of money, called potentially exempt transfers (PETs), which can be made at least seven years prior to death, however, this comes with “some conditions”.
Mr Harrison said: “One duly being that the assets must be an outright gift, rather than, say, loaned or a gift with reservation, and another is that should the donor die within the seven-year period, IHT becomes payable on a sliding scale.”
An important caveat to note is that determining whether the gift is exempt only takes place after the person’s death and according to Mr Harrison, is “subjective”.
He said: “There’s a risk some gifts may be classed as being within your estate for IHT purposes if the taxman decides they did affect your lifestyle for example; therefore if you are making habitual gifts, it’s important to document your intentions and keep a record of this with your will.”
Take out life insurance
Life insurance can be a “simple” but “effective” way to cover an IHT bill, Mr Harrison said.
He explained: “You take out cover and place it under a trust (so that the pay-out falls outside of your estate) and on your death, it clears any IHT bill without exacerbating the tax situation.”
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