Rising inheritance tax take – time to review your estate planning

Post by Mearns & Company in News

New data from HMRC show that in 2022/23 inheritance tax (IHT) payments hit a new high. Are you going to contribute more?

Source Nationwide, HMRC

Many of the pay disputes of the past months have revolved around the way that wage increases have been outpaced by inflation in recent years. However, nobody has yet claimed to have been stuck on the same income for the past 19 years. A policy of ignoring the impact of rising prices for nearly two decades would be impossible.

And yet switch from the subject of earnings to tax and a 19-year freeze goes from unimaginable to reality, as confirmed in the last Budget. The tax in question is IHT and the element subject to the prolonged stasis is the nil rate band.

The band was set at £325,000 in April 2009 and has since been subject to rolling short-term freezes. This year’s Budget extended the latest freeze to April 2028. Had any of the eight Chancellors since 2009 decided to restore the real value of the nil rate band with a CPI inflation link, it would now be around £475,000.

That none of the Chancellors chose the thaw option has been highly beneficial to the Exchequer. In 2009/10, the first year of the £325,000 nil rate band, IHT receipts amounted to around £2.4 billion. Figures recently released for 2022/23 show receipts close to tripling at just over £7 billion in the fourteenth year of the freeze.

Mitigating the freeze

IHT has become a tax which now potentially affects many more people, particularly after a surviving spouse or civil partner dies. On first death there is normally no tax to pay because, with limited exceptions, gifts to spouses or civil partners are exempt from IHT. Thus, it is often the children or grandchildren who experience first-hand the full impact of IHT.

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 over the years have turned pensions into a valuable estate planning tool.
• 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. This little-known exemption can be used to give away investment income which you would otherwise allow to accumulate, for example within an ISA.
• 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 leaving the sometimes arbitrary rules of intestacy to decide who gets what.
• Skip a generation By passing money directly to your grandchildren, you could reduce the IHT your children’s estate will suffer.

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.

For specialist tax advice, please refer to an accountant or tax specialist.

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.