Recent HMRC figures, published by FTAdviser, confirm that the Treasury’s Inheritance Tax (IHT) receipts for the first month of the tax year topped £700 million. April 2024’s figure marked a 7.2% increase from 2023, amounting to an extra £85 million.
Frozen tax allowances are one reason why more families are being caught out by IHT. Back in 2009/10, the proportion of deaths that resulted in an IHT liability sat at around 2.7%. That figure is forecast to rise to 6.3% in the next four years.
With the Treasury’s tax take rising, and more estates being caught in the IHT net, estate planning is more important than ever.
Keep reading for three ways to lower your IHT liability and leave more to your loved ones.
Thresholds are currently frozen until at least 2028
Generally, IHT is paid at 40% on the portion of your estate that exceeds certain thresholds. The so-called “nil-rate band” currently stands at £325,000, while the “residence nil-rate band” stands at £125,000.
The nil-rate band has been at its current level since 2009 and is set to remain frozen until 2028. The residence nil-rate band, meanwhile, was introduced in 2017 and has been at its current level since April 2020. It too is currently frozen until 2028.
As house prices and the value of your investments have risen over recent years, these frozen allowances will have become an increasing concern. HMRC reports that IHT receipts reached £7.1 billion in 2022/23 – an increase of £1 billion on the previous year.
There are several ways you might be able to reduce a potential tax liability, allowing you to leave more to your loved ones, while reducing the stress they feel at an already difficult time.
3 simple ways to mitigate an Inheritance Tax liability
1. Understanding PETs
One way to lower a potential tax liability on death is to decrease the value of your estate for IHT calculation purposes.
You can usually make as many gifts as you like during your lifetime tax-free, as long as you live for seven years from the date you give the gift. This is known as the “seven-year rule”.
If you give a gift within the three years before your death, and there is IHT to pay on it, the full 40% will apply. Live for between three and seven years, though, and tax will be applied on a sliding scale known as “taper relief”.
Giving gifts earlier in your life can help to lower the value of your estate. It could also increase the likelihood of you surviving for more than seven years from the date the gift is made.
Remember, though, that taper relief only applies if the total value of gifts made in the seven years before your death exceeds the nil-rate band.
2. Tax-efficient gifting using HMRC exemptions
While all gifts are tax-free if you live for a further seven years, some gifts are tax-free from the outset. This is thanks to HMRC exemptions.
Annual exemption
You have an HMRC annual exemption that allows you to gift up to £3,000 a year tax-free.
This allowance is individual to you and can be carried forward for one year. You and your partner could potentially gift £12,000 in a single tax year if you didn’t use your allowance in the previous year.
Making use of this allowance could help to reduce the value of your estate while providing your loved ones with a living inheritance, possibly at a time when they need the money most.
Normal expenditure out of income
Another useful – and underused – HMRC exemption is known as “normal expenditure out of income”.
It allows you to provide your loved ones with ongoing (and tax-efficient) financial support, as long as you can prove that the gifts you make are regular, made from income as part of your normal expenditure, and don’t affect your standard of living.
You could use the money to give tax-free contributions to a grandchild’s Junior ISA or a partner’s pension, for example.
The Telegraph reports that just 430 people made use of this exemption in 2022/23 and yet it could prove incredibly valuable.
3. Starting your planning early
It’s important to remember that estate planning and IHT mitigation aren’t concerns only for retirement or later life. To be successful, these strategies should be put in place early.
We can help you to think about:
- The rising value of your estate and the potential for an IHT liability to arise
- Giving while living to lower the value of your estate tax-efficiently.
- How you pass money to loved ones on death, from your will to trusts and protection products.
Many aspects of your financial plan could ultimately affect the size of the IHT liability you leave behind. We can help you manage this complex area so if you need any help, be sure to contact us.
Get in touch
Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you manage your estate and your long-term financial plans.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief. Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.
The Financial Conduct Authority does not regulate estate planning, tax planning, or will writing.
