Benjamin Franklin said, “In this world, nothing [is] certain, except death and taxes”.
Inheritance Tax (IHT) combines these two certainties, and it may reduce the wealth you can pass on to your family, especially as IHT receipts are rising.
According to MoneyAge, HMRC raised £7.1 billion from IHT between April 2022 and February 2023. This is around £1 billion more than the previous year.
It’s more important than ever to make sure that you understand IHT rules and whether the tax is likely to affect your estate.
The “nil-rate bands” freeze is extended to 2028
In his 2021 spring Budget, Rishi Sunak froze the “nil-rate band” and the “residence nil-rate band” – the amount that you can pass on to your family before triggering an IHT charge – until 2026. Jeremy Hunt used his recent spring Budget to extend the freeze until 2028.
As the value of your estate rises – your house increases in value or you receive returns on investments, for example – more of your wealth could exceed the nil-rate bands. This is known as “fiscal drag” and it could leave your family with more IHT to pay.
You’ll want to consider your potential IHT liability, but before you do, several commonly held IHT myths need busting. Here are five of them.
1. Only very wealthy people pay IHT
Many people believe that IHT only affects very wealthy people, but that is not necessarily true.
According to government figures, 3.76% of UK deaths triggered an IHT charge in the 2019/2020 tax year. That is a slight increase from the previous year.
As the nil-rate bands remain frozen, the number of estates that trigger an IHT charge will likely increase again in the future, making your family more likely to pay IHT than you think.
2. You don’t have to pay IHT on gifts
Gifting can be a useful way to reduce IHT, but the rules are not as simple as many people assume. While some gifts fall outside of your estate for IHT purposes, they must meet specific criteria.
Your annual exemption means you can gift up to a total value of £3,000 in the 2023/24 tax year and the gifted amount will fall outside of your estate. Other exemptions exist too, allowing you to make regular “gifts from income” but these are subject to a different set of rules.
Gifts outside of specific HMRC exemptions are not automatically exempt from IHT. You’ll normally need to survive for seven years after giving the gift before it falls outside of your estate.
When used correctly, gifts can be a tax-efficient way to pass wealth to your family but you’ll need to be sure of the rules. Speak to us before you make any gifting decisions.
3. A property can always be passed on without Inheritance Tax
Your home is likely the most valuable asset that you will pass on to your family after you are gone.
While you will likely benefit from the £175,000 residence nil-rate band when passing on your main residence, it is a misconception that you can always pass on a property without IHT.
If the property is worth more than £175,000, for example, your family may pay IHT on the excess.
The rules are also more complicated if you gift your home while you are alive.
Ordinarily, a gift falls outside of your estate if you survive for seven years after giving it. But the “gift with reservation of benefits” rules may apply when gifting your home.
Under these rules, if you continue to derive benefits – such as living in your home after you gift it without paying a market rent – the standard seven-year rule no longer applies and the property could remain part of your estate for IHT purposes.
You’ll also need to Stamp Duty Land Tax and Capital Gains Tax (CGT).
4. Assets in other countries are not considered for Inheritance Tax purposes
If you have assets in other countries, like a holiday home or foreign investments, for example, you may think that they are not subject to IHT in the UK.
That is not always the case. Normally, if you are a UK resident and UK domiciled, your family will have to pay IHT based on the total value of your assets – including those held abroad.
There may also be additional death taxes in the country where you hold those assets. This can make it complicated to work out the potential tax liability as multiple sets of rules from different countries apply.
5. The government raises a huge amount of money from Inheritance Tax
IHT is often called the UK’s “most hated tax” but the idea that the government raises a huge amount of money from IHT is misleading.
While it is true that receipts are increasing, the relative amount the tax brings in is quite small.
While the government generated £7.1 billion from IHT receipts between April 2022 and February 2023, the Institute for Fiscal Studies (IFS) confirms that Income Tax generated more than £198 billion over the same period.
Get in touch
If you’re having difficulty understanding IHT rules and how they could affect you and your family in the future, we can help.
Please get in touch via email at enquiries@hda-ifa.co.uk or call 01242 514563.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
