Figures out today show that HMRC raked in another £2.4 billion in inheritance tax receipts in the three months to July 2022. This is £300 million more than in the same period last year.
Liz Truss and Rishi Sunak have both suggested they would review inheritance tax rules as Prime Minister. This could mean scrapping this most hated of taxes altogether, cutting the 40% rate, increasing the threshold which has been frozen since 2010 at £325,000, or making more assets exempt, such as ISAs. Alternatively they could introduce an American-style estate tax, which in its simplest form is effectively a cap on the amount that anyone can give away in their lifetime and each year, tax free.
Alex Davies, CEO and Founder of Wealth Club said: “Inheritance tax reform is a potential vote winner for Rishi Sunak and Liz Truss among Conservative party members, but it’s hard to imagine it will be top of their agenda in any emergency Budget once they step into power. Cutting inheritance tax will do nothing to ease the cost of living crisis engulfing the country, and it’s a real cash cow for the Treasury too. IHT generates around £800 million in tax revenue each month, a very meaningful sum at a time when 29 million households are being given £400 each to offset energy bills.
The increase in the monthly IHT take is being driven by soaring house prices and years of frozen allowances. With rampant inflation, the effect of freezing allowances will only increase in the years ahead unless the new Prime Minister chooses to intervene. While just 4% of estates pay inheritance tax at the moment, without some review of the rules, more and more families are going to find themselves hit by death duties they might not have expected.”
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 are bringing more and more into the taxman’s sights.
- Wealth Club calculations suggest the average bill could increase to just over £266,000 in the current tax year. This is a 27% increase from the £209,000 average paid just three years ago.
- While you can pass on money IHT free to your spouse or civil partner, the estate could still be subject to IHT when they die 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 over £2.35 million.
“The good news is that there are still lots of perfectly legitimate and sensible ways to pass on money free of inheritance tax to your heirs.”
- 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 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.
- Make larger gifts
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.
- Leave a legacy – give to charity
- 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 on death though.
- 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. You must hold the shares for at least two years and if you still hold them on death you could potentially 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.
- 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).
- Spend it
One sure-fire way to keep your wealth away from the taxman’s hands is to spend it.
*Based on OBR predictions that IHT will increase in 2022/23 tax year to £6.7bn – https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/inheritance-tax/– we believe in the 2022/23 tax year the average tax bill could be a little over £266,000.