The last financial year saw a record £7.5billion collected in Inheritance Tax (IHT) – and it is predicted to hit £10bn by the end of the decade.
The numbers from HM Revenue and Customs (HMRC) has shown that IHT receipts increased by £400m year-on-year, after £7.1bn was collected in 2022/23.
This really should come as no great surprise to no-one at all because the threshold for IHT has been frozen at £325,000 since 2009 – is your house still worth what it was in 2009?
The answer should be no and the result is many more people owning even relatively modest properties have been pulled into the IHT zone because the value of their assets has risen – this is known as ‘fiscal drag’.
Inheritance Tax or ‘death duties’ is the amount paid to the Taxman on the value of an estate when an individual dies, usually at 40% and on anything over £325,000, which is your personal IHT tax threshold.
The data shows that more people with only modest estate values are being dragged into the ‘IHT trap’.
However, it is also quite possible IHT will not apply to your situation or if it does, there are several ways you can legally avoid it or at least reduce the total.
Our first advice to anyone who is unsure of their situation is to seek advice! Speak to an Independent Financial Adviser (IFA) to find out what applies in your circumstances.
It is something your family or partner will not want to be dealing with when you pass away – indeed by that point it is too late – so forward planning is important.
Firstly anything you leave to a spouse or civil partner is exempt from IHT – but you MUST be married or in a civil partnership for this to happen.
Living together as ‘common law’ partners, for however long and whether you have children or not, will not save you from this tax, so it is well worth considering if you should go and get ‘that bit of paper’.
You may need to consider children or other dependents – if your will specifies that on death your estate goes to offspring, not your partner, you will not be able to avoid IHT.
It also goes without saying these are discussions you should have with your partner and family long before anything might happen.
On top of that, it’s worth noting that any unused IHT allowance will also be passed on to a spouse when you pass away – but again, you must have been married or in a civil partnership.
If you leave your home to your ‘direct descendants’ (children or grandchildren whether biological, adopted or step, but not nieces and nephews etc) your IHT allowance is effectively boosted to £500,000 because you take advantage of the ‘residence nil-rate band’ allowance.
This is set at £175,000 but has also been frozen for quite some time.
You can also legally cut the IHT bill by giving away gifts – you have an annual allowance of £3,000 tax free that you can gift to someone else. This can also be carried over for one tax year.
IHT will however be due on gifts given away less than seven years before you die if they are not considered tax-free gifts or the gifts amount to more than £325,000 (the tax-free threshold).
No one can plan entirely for the unexpected, but clearly in this scenario long range forward planning could pay off for your family many years down the line.
As ever, we are happy to discuss any of these matters with you with no obligations.
