Rising inheritance tax take - is it time to review your estate plan?

Inheritance tax (IHT) does seem to be a very polarising topic for many. Some agree that generational wealth should be taxed, while others would argue that the ‘nest egg’ has already suffered income tax during the deceased’s lifetime and why should it be taxed twice?

Senior Tax Manager, Carly Drummond, explains, “We used to refer to IHT as an optional tax, and to some extent that still stands if you’re prepared to make use of planning opportunities, one of which would be making full use of Potentially Exempt Transfers (PETs) to give everything you don’t need away, at least seven years before you die.

However, in a world of rising living costs and care fees, people are understandably concerned about leaving themselves short in the latter years of their life. Consideration also needs to be given to who you would be gifting your wealth away to, whether outright gifts are appropriate and whether recipients will have their own IHT issue to consider.

As a very broad rule of thumb, a married couple can pass a joint estate of up to £1,000,000 on death free of IHT to the next generation. The £1,000,000 is achieved by combining two Nil Rate Bands (NRB) totalling £650,000 with two Residence Nil Rate Bands (RNRB) of £350,000. This is on the basis that the first to die leaves everything to the survivor and that the main residence at least then passes to a direct descendant following the second death. To qualify in full for the RNRB, your total estate must be worth less than £2,000,000 as your entitlement will start to taper away after this point. Importantly this is before the application of any reliefs such as Agricultural or Business Relief. It can cost your estate up to £140,000 of additional tax not to plan for this effectively.

In reality, there won’t just be a ‘one-size fits all’ answer to this issue and it may be a combination of planning and sensible investment and potentially insurance which helps to give you piece of mind.

Going back to the initial point, it’s easy to see that with no movement in the NRB thresholds in line with house price inflation, that lots of people who have never really considered their tax position before, may well now fall within the net of IHT”.

New data from HMRC show that in 2022/23 inheritance tax (IHT) payments hit a new high.

The IHT NRB was set at £325,000 in April 2009 and has been frozen ever since. This year’s Budget extended that freeze to April 2028. For the first year of the current NRB in 2009/10, IHT receipts amounted to around £2.4 billion. Figures recently released for 2022/23 show receipts at just over £7 billion in the fourteenth year of the freeze.

IHT has become a tax which now affects many more people. In the case of married couples or civil partners, tax is usually payable on the second death because if on the first death all assets pass to the surviving spouse that is an exempt transfer for IHT. It is therefore often the children or grandchildren who experience first-hand the full impact of IHT.

Mitigating the freeze

If you want to limit the Treasury’s share of your estate, the sooner you start planning, the better. Unfortunately, one of the simplest strategies – making substantial lifetime gifts – is often not a practical option. However, there are other routes to lowering the IHT bill on your estate, including:

• Make the most of pensions. Although the primary role of pension arrangements is to provide income in retirement, legislative changes have turned pensions into a valuable estate planning tool.
• Consider IHT-efficient investments. Some investments provide access to Business Relief from IHT, and others can pass wealth to the next generation while the donor retains some access or an entitlement to income.
• Use the normal expenditure exemption. If you make gifts that are regular, out of normal income and that do not reduce your standard of living, then they are free of IHT.
• Make a will and, if you already have one, keep it up to date. The right will can not only help save IHT, but also means that you choose your beneficiaries rather than the arbitrary rules of intestacy.
• Skip a generation. By passing money directly to your grandchildren, you could reduce the IHT on your children’s estate. It is often possible to do this while maintaining some asset protection with the use of certain types of investments or trusts.

IHT planning is best considered as part of your overall financial planning, rather than in isolation. Professional advice is essential to navigate the complexities of the legislation.

Find Out More

To discuss IHT further, or for any questions on personal tax matters, please contact our tax team.

This article is from the latest edition of the Caves Quarterly newsletter. Download your copy here.

For more insights into financial planning, visit our Wealth Management page or contact your local office with any questions.

Important Information/Risk Warnings

The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.

The Financial Conduct Authority does not regulate will writing and some forms of estate planning.

MHA Caves Wealth is authorised and regulated by the Financial Conduct Authority (FCA), Financial Services Register number 143715.

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