Figures released by HMRC today show that the Treasury raked in £5.3 billion in inheritance tax receipts in the months from April to December 2022. This is £700 million more than in the same period a year earlier, continuing the upward trend.
The government’s inheritance tax take seems to be increasing thanks largely to years of house price increases, especially in London and the south-east, pushing families that wouldn’t probably consider themselves wealthy, over the threshold. In the Autumn Statement in November it was also announced that the inheritance tax threshold of £325,000 will be frozen until April 2028.
The revenue generated from inheritance tax plays an important part in the government’s spending programme. While the average bill was £216,000 in 2019/20, research conducted by Wealth Club shows the average inheritance tax bills could reach £304,567 by 2025-26 and £345,084 by 2027-28.
Alex Davies, CEO and Founder of Wealth Club said: “Contrary to popular belief, inheritance tax doesn’t just affect the super-rich, many who would not consider themselves wealthy at all will also bear a considerable burden. Rampant inflation and years of frozen allowances and soaring house prices mean many more families will find themselves hit with a hefty inheritance tax bill which they might not have envisaged or planned for.
“No one likes to pay more tax than they need to and Inheritance tax is probably the most hated of all taxes. But with a little planning, there are a number of perfectly legitimate ways to reduce your liability. Pensions can be passed on to the next generation relatively tax efficiently. The greatest IHT threat probably comes from where you least expect it: your ISA. Contrary to what many think, ISAs are not IHT free. So, if you do nothing, up to 40% of your long-term savings could eventually be eaten up by tax. An alternative is to invest in an AIM ISA, a managed portfolio of AIM shares that can be IHT free after two years. You still get the ISA benefits of tax-free income and growth for as long as you live, but you don’t need to worry about IHT on top.
And if you are prepared to take more risk, consider investing in early-stage businesses through EIS and SEIS. Not only are they very tax efficient, but also your money goes to entrepreneurial companies, which is great for economic growth and job creation.”
- Make a will
Making a will is the first step you should take. Without it, your estate will be shared according to a set of pre-determined rules. That means the taxman might end up with more than its fair share.
- Use your pension allowance
Pensions are not usually subject to IHT for those under 75 years old – they can be passed on tax efficiently and, in some cases, even tax free. If you have any pension allowance left, make use of it.
- Set up a trust
Trusts have traditionally been a staple of IHT planning. They can mean money falls outside an estate if you live for at least seven years after establishing the trust. The related taxes and laws are complicated – you should seek specialist advice if you’re considering this.
- Invest in companies qualifying for Business Property Relief (BPR)
If you own or invest in a business that qualifies for Business Property Relief – the majority of private companies and some AIM-quoted companies do – you can benefit from full IHT relief. You must be a shareholder for at least two years and still be so on death.
- Invest in an AIM IHT ISA
ISAs are tax free during your lifetime but when you die, or when your spouse dies if later, they could be subject to 40% IHT. An increasingly popular way of mitigating IHT on an ISA is to invest in certain AIM quoted companies which qualify for BPR. When you die as long as you still own the shares and have done so for at least two years you should be able to pass them on without a penny due in inheritance tax.
- Back smaller British businesses
The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) offer a generous set of tax reliefs. For instance, SEIS offers up to 50% income tax and capital gains tax reliefs, plus loss relief if the investment doesn’t work out. But EIS and SEIS investments also qualify for BPR, so could be passed on free of IHT after two years.
- Invest in commercial forestry
This is an underused option for experienced investors. Pension funds and institutions have long ploughed money into forestry. The Church Commissioners has a forestry portfolio worth £400 million. Commercial forest investments should be free of IHT if held for at least two years and on death. You should also benefit from capital appreciation in the value of the trees (and the land they are on) and from any income produced by harvesting the trees and selling the timber (this income may also be tax free).
- Use your gift allowances
Every year you can give up to £3,000 away tax free. This is known as the annual exemption. If you didn’t use it last year, you can combine it and pass on £6,000. You can also give up to £250 each year to however many people you wish (but only one gift per recipient per year) or make a wedding gift of up to £5,000 to your child; up to £2,500 to your grandchild; up to £2,500 to your spouse or civil partner to be and £1,000 to anyone else. Beyond these allowances, you can pass on as much as you like IHT free. So long as you live for at least seven years after giving money away, there will be no IHT to pay.
- Make regular gifts
You can make regular gifts from your income. These gifts are immediately IHT free (no need to wait for seven years) and there’s no cap on how much you can give away, provided you can demonstrate your standard of living is not affected.
- Leave a legacy – give to charity
If you leave at least 10% of your net estate to a charity or a few other organisations, you may be able to get a discount on the IHT rate – 36% instead of 40% – on the rest of your estate.
- Spend it
How inheritance tax is calculated
- Inheritance tax (IHT) of 40% is usually chargeable if one’s assets exceed a certain threshold, after deducting any liabilities, exemptions and reliefs.
- The threshold (nil rate band) has been £325,000 per single person since 6 April 2009 – and will stay frozen at this level up to and including 2028-29.
- There is an additional transferrable main residence nil rate band of £175,000 available when passing the family home down to children or other direct descendants.
- Any unused threshold may be transferred to a surviving spouse or civil partner. So, a couple could currently potentially pass on up to £1 million before IHT might apply.
Key IHT stats
- One in every 25 estates pay inheritance tax, but the freeze on inheritance tax thresholds, paired with inflation and decades of house price increases is bringing more and more into the taxman’s sights.
- While you can pass on money IHT free to your spouse or civil partner, the estate could still be subject to IHT on their death though they may be able to make use of your pass-on allowance.
- The main threshold is the nil-rate band, enabling up to £325,000 of an estate to be passed on without having to pay any IHT. This has been unchanged since April 2009.
- There is also a Residence Nil Rate band worth £175,000 which allows most people to pass on a family home more tax efficiently to direct descendants, although this tapers for estates over £2 million and is not available at all for estates worth over £2.35 million.
- Wealth Club calculations suggest the average inheritance tax bill could increase to just over £252,000 in the current tax year. This is a 16.7% increase from the £216,000 average paid just three years ago.