Data published by HMRC today reveals that Inheritance Tax (IHT) receipts for April 2023 to July 2023 totalled £270.2 billion, representing a £17.3 billion increase compared to the same period the year before.
Stevie Heafford, Tax Partner at the accountancy firm HW Fisher explains: “Last year the Chancellor decided to freeze the Inheritance Tax nil rate band until 2028. As a result, more people are going to find themselves caught in the inheritance tax trap. Fortunately, significant changes to pension allowances announced in the Spring Statement means that there may be an opportunity for people to leave behind more to their loved ones via their pension pots.”
In light of a number of recent changes, HW Fisher answers ten of the most commonly asked questions when it comes to IHT.
1. When do I need to start Inheritance Tax planning?
As early as possible as your circumstances and exposure to IHT will change over time. Early on, an insurance policy might be all that is necessary but more complex planning will be appropriate as wealth increases.
2. Can I afford to make lifetime gifts?
A good tool is a professional cash flow forecast which is updated regularly. You can plan in major life events (such as marriage, holidays, care fees) and see what your overall position is.
3. Is IHT planning only for the wealthy?
No – many people have been pushed into the IHT net due to increases in property values.
4. What is the current Nil Rate Band?
The current nil rate band is £325,000 per person. This can be used against both lifetime transfers and transfers on death. It effectively “refreshes” every 7 years. Any unused nil rate band as at the date of death can be transferred to a surviving spouse for use on their death.
5. What is the Residence Nil Rate Band?
This is a further nil rate band of up to £175,000 which is available if the residential property is passed to lineal descendants. It is only available against the death estate, but any unused relief can be passed to a surviving spouse. The relief is tapered for estates in excess of £2 million.
6. Can I make lifetime gifts free of IHT?
Yes, the Nil Rate Band can be set against lifetime gifts as well as on death. There is also an annual exemption of £3,000 – this can be rolled forward up to 1 tax year.In addition to this, small gifts of up to £250 and gifts out of excess income can be made to anyone free of IHT. You can also make gifts of between £1,000 and £5,000 (depending on the relationship to the giftee) in consideration of marriage or civil partnership.
7. Is it tax efficient to make gifts to charity?
Yes – gifts to charity are tax exempt and if you leave at least 10% of your net estate to charity, the rate of IHT is reduced to 36%.
8. I have a business. Will that be exempt?
Business Property Relief of up to 100% is available for businesses and shares in certain companies, as well as some assets that are held personally, but used by the business/company. However, it is easy to taint this if investment assets or excess cash are held within a trading business.For agricultural assets, similar relief is available. In the Spring Statement, the Chancellor announced that the government is organising a consultation to explore the taxation of ecosystem service markets, and the potential expansion of agricultural property relief from inheritance tax to cover certain types of environmental land management. It will also restrict the geographical scope of agricultural property relief and woodlands relief from inheritance tax to property in the UK from 6 April 2024.
9. Can I leave my estate to my spouse tax free?
Yes, if the estate is left to a surviving spouse, this is tax free. The surviving spouse will also inherit any unused Nil Rate Band and Residence Nil Rate Band. Bear in mind that this will increase the spouse’s estate for IHT so may only be delaying the problem.
10. Can I pass on my pension tax free?
Yes, you can pass on a pension pot tax IHT free. It is therefore better to draw down on cash assets (bank accounts, ISAs etc) in priority to the pension as those assets will be subject to IHT on death.
In the recent Spring Statement, the Chancellor abolished the Lifetime Pensions Allowance and the annual cap on tax-free pensions contributions was increased to £10,000 a year. These changes have made pensions potentially even more valuable for IHT planning as you can pay more into your pension, and still have access to your funds should something unexpected happen. As always, the devil is in the detail so do seek advice in this regard and bear in mind the rules could change in the future.
Stevie adds: “From the 13th April, the rate of interest on overdue IHT increased from 6.50% to 6.75% – making it even more expensive to get this tax wrong. Once you have worked out what you can afford to give away, we’d recommend seeking professional advice. There are a number of possibilities and pitfalls in IHT planning and a professional is trained to evaluate the knock-on effects of other taxes – such as Capital Gains Tax – which might be triggered by IHT planning.”
If you would like to discuss specific circumstances with an Inheritance Tax Specialist, please get in touch
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