The government’s decision to freeze Inheritance Tax (IHT) thresholds is costing taxpayers billions each year.
Already frozen until 2026, receipts are set to increase again following Jeremy Hunt’s decision to further extend the nil-rate and residence nil-rate band freezes until 2028.
You can take steps now to mitigate a future liability and it is crucial that you do. Thankfully, Globe IFA are on hand to help.
Keep reading to find out what’s causing the huge rise in IHT bills and what steps you can take to ensure that your estate isn’t hit by a hefty bill.
Rishi Sunak opted to freeze the thresholds back in 2021
The IHT thresholds were frozen until 2026 during the 2021 Spring Budget. At the time, it was hoped that the measure would raise around £985 million for the Treasury.
Since then, IHT receipts have continued to rise.
The situation has been exacerbated by Jeremy Hunt’s extension of the freeze to 2028, as well as the government’s decision to increase the interest rate it charges on overdue IHT bills by 6% from the start of 2023.
Professional Adviser reports that IHT receipts for April 2022 to October 2022 topped £4 billion. This marks a £0.5 billion rise compared to the same period 12 months earlier.
The Office for Budget Responsibility (OBR) recently confirmed that receipts for the whole of 2021/22 reached £6.1 billion. This is expected to rise by a massive 28% by 2027/28 when receipts could exceed £7.8 billion.
Getting on top of your estate planning now is crucial to avoid a huge liability
The nil-rate and residence nil-rate bands are the thresholds below which there is unlikely to be any IHT to pay. Any value of your estate that exceeds these thresholds becomes subject to IHT at 40%.
The nil-rate band (NRB) is currently £325,000. The residence nil-rate band (RNRB), meanwhile, is currently £175,000. The RNRB allows you to pass your home to your children or grandchildren. Both thresholds are currently frozen until 2028.
Any unused allowance can be passed to a surviving partner on death, potentially doubling their available threshold to £1 million. It is worth noting, though, that the RNRB tapers by £1 for every £2 your estate exceeds the £2 million limit, effectively ceasing for an estate worth more than £2.35 million.
Financial planning can help you to think about a potential liability on death, helping you lower the value of your estate for IHT purposes.
2 simple ways to lower a potential IHT liability on death that you can plan for now
1. Make clever use of your pension
Under current rules, unused pension pots remain outside of your estate in most circumstances. This makes them a perfect vehicle for tax-efficient estate planning.
You will need to choose a beneficiary via your scheme provider (rather than through your will). This can be done using an “expression of wish” form. With a beneficiary in place, they will receive:
- 100% of your unused pension pots (usually tax-free) if you die before age 75
- 100% of your unused pension pots (taxed at the highest rate of tax they pay) if you die before age 75.
If you expect to be receiving non-pension income during your retirement, you might consider using this first, leaving your pension plans untouched until they are needed.
2. Give gifts to lower the value of your estate
You can make as many gifts as you like during your lifetime, known as “potentially exempt transfers (PETs)”.
They are called PETs because they are tax-exempt, but only if you survive for seven years after making the gift. If you survive longer than three years, but less than seven, tax is payable on a sliding scale as taper relief.
Giving while living has grown in popularity over recent years, partly because making a gift earlier in life makes it more likely you will live long enough for the gift to become tax-free. You’ll also still be around to see the difference your money makes and the joy it brings.
Some HMRC exemptions allow you to make tax-free gifts. The most useful exemptions include the:
- Annual exemption of £3,000, which allows gifts up to this amount to be made tax-free each year
- Small gift exemption that means any gifts under £250 are tax-free, as long as the person receiving the gift hasn’t already received your full £3,000 annual exemption
- Gifts from regular income exemption that allows for regular gifts to be made tax-free as long as they are made from income and don’t detrimentally impact your standard of living.
These gift exemptions can lower the value of your estate and so the excess that is liable to 40% tax.
You might also consider making gifts to charity, which are always tax-free, regardless of how long you survive after making the gift.
Get in touch
With IHT receipts increasing – and expected to keep rising – estate planning is more vital than ever. 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 tax-efficiently and avoid a large IHT bill.
Please note
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
