The latest figures from HM Revenue and Customs (HMRC) show that inheritance tax receipts received by HMRC increased by £100 million to £1.1 billion in the period of from April 2022 to May 2022. This is a significant increase from the same period in the previous year, and continues the upwards trend over the past decade. The freeze on inheritance tax thresholds until 2026, rising inflation, currently at 9.1% and decades of increasing property prices collectively bring an increasing number of estates above the threshold.
For those that are paying inheritance tax the average bill three years ago was £209,000, although Wealth Club calculations suggest the average bill could increase by 27% to just over £266,000 in the 2022/23 tax year.
Inheritance tax is only paid if a deceased persons estate is over a certain threshold. This is called the nil-rate band and applies to everyone, enabling up to £325,000 of an estate to be passed on without having to pay any IHT. Anything above this could be subject to up to 40% inheritance tax, but this nil-rate band has stayed at the same level since April 2011.
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: “No one likes to pay more tax than they need to, and inheritance tax is probably one of the most hated taxes of them all. But with a little tax planning, there are a number of perfectly legitimate ways to reduce your inheritance tax liability. It’s also vitally important to keep any wills up to date in order to reflect any changes in circumstances, or of the heart, and this should be reviewed regularly, whether you’re married or not.”
Key IHT stats
• In the tax year 2018 to 2019, 3.7% of UK deaths resulted in an Inheritance Tax (IHT) charge.
• The average liability increased by 6% (£12,000) in the tax year 2018 to 2019 to £209,000.
• London and the South East have the highest numbers of estates resulted in an IHT charge, accounting for 53% of the total IHT charged across England, and 46% of the total IHT charged across the UK. The average taxpaying estate in London paid £271,800.
• The lowest IHT paying regions had average IHT charges of £152,900 in the North West of England, £156,000 in Wales and £158,700 in Northern Ireland. This is most likely attributed to lower house prices in those regions.
• In the tax year 2018 to 2019, the average taxpaying male-owned estate had a net capital value of £1.2 million and a tax charge of £203,900.
• The average taxpaying female-owned estate had a slightly lower net capital value of £1.1 million and a slightly higher tax charge of £212,605. In general, female-owned estates tend to have higher tax charges than those owned by males most likely due to the fact that females tend to have a higher life expectancy than males.
Ways to save IHT
• Give it away early. Gifts made 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. In fact, all gifts are potentially IHT free. But timing is crucial, as gifts made within the last seven years are not exempt although the amount of IHT begins to reduce after three years. 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 alternative. 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.
• A way that a person can decrease their rate of tax paid is by giving 10 percent of their estate to charity. That potentially reduces the IHT rate on your remaining estate from 40% to 36%.
• 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.