The number of estates faced with paying Inheritance Tax (IHT) is on the rise as the nil-rate band remains frozen and property prices continue to increase.
The Office for Budget Responsibility (OBR) has forecast that IHT receipts will amount to £7.2bn in 2023/2024, up from £6.1bn in 2021/2022.
The Government has frozen the IHT nil rate bands until at least April 2026. By then the main nil rate band will have been £325,000 for no less than 17 years, meaning more and more people may find themselves faced with an IHT liability.
This 40% levy is charged on the value of all of your estate’s assets over the £325,000 threshold when you die. Assets left to your spouse or civil partner, and those left to charity, are usually exempt.
With careful financial planning, however, there are a number of strategies to help mitigate your liability and the key is to start this planning as early as possible.
The normal expenditure out of income exemption can save thousands in IHT and can also be combined with some other allowances, apart from the small gifts allowance (see below).
To benefit from this tax relief gifts must be:
While this is one of the most generous exemptions - as taxpayers can gift any amount of money provided all three components above are satisfied - figures from HMRC revealed that it is largely underused.
Normal expenditure out of income could be used, for example, to put into a child’s saving account, go towards university fees or help friends or relatives.
Outright gifts suffer no immediate IHT liability and are free of IHT if you survive seven years after making them. If you do not reach the seven-year point, any IHT liability on the gift is reduced by 20% per year from the start of the fourth year, e.g., at five and a half years only 40% of the full IHT is payable on death.
The annual exemption rate is set at £3,000 and married couples are able to utilise two allowances, giving them a total of £6,000 per year to use.
This enables you to give away money or gifts up to the value of £3,000 every tax year without them being added to the value of your estate and you can also carry forward any unused annual exemption for one tax year.
The £250 small gifts exemption enables you to give £250 to any number of people of your choosing and will immediately be exempt from IHT. However, the drawbacks of this exemption mean you are unable to use it together with other exemptions and can’t be included in a larger gift.
Despite these amounts seeming small relative to someone with a significant estate, the annual exemption’s compound effect over a period of time can generate significant IHT savings.
There are other steps you can take in addition to those mentioned above, such as spouse and civil partner exemptions and agricultural and business property reliefs, however, as with any financial and tax planning around this area it is advisable to seek advice as to what step(s) is most appropriate for you and your family. Please get in touch with your adviser or email email@example.com for further information.
At Armstrong Watson, we provide bespoke tax planning, financial planning and wealth management under one roof. Please note, advice on IHT-related matters could be provided by a mixture of both our financial planning and tax specialists.