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3 simple steps to managing your Inheritance Tax liability as receipts soar

Category: News

MoneyAge reported back in April that the Treasury’s Inheritance Tax (IHT) receipts for the 2022/23 tax year were around £7.1 billion. That marked a £1 billion increase on the previous year.

While IHT is by no means the biggest earner for the government – Income Tax, for example, brought in around £249 billion over the same period – recent IHT threshold freezes do mean that more and more of us will be affected.

So, what can you do now to lessen your potential liability? And why are IHT receipts on the rise?

IHT threshold freezes are in place and have been extended

Then-chancellor Rishi Sunak used his 2021 spring Budget to freeze the thresholds at which IHT becomes payable. The nil-rate band stands at £325,000 while the residence nil-rate band is currently £175,000.

The thresholds were originally frozen until 2026. However, Jeremy Hunt used his first budget as chancellor to extend both freezes until 2028.

The value of your estate must exceed £325,000 before there is any IHT to pay. You can also pass on a residence IHT-free if it is worth less than £175,000. It is worth noting too that these thresholds can be passed between spouses, potentially allowing your partner up to £1 million of IHT-free estate.

The value of your estate that exceeds the thresholds is liable to IHT at 40%.

3 simple ways to lower your potential IHT bill

1. Giving while living

Making gifts during your lifetime can lower the value of your estate for IHT calculation purposes. This means there is potentially less IHT to pay on death.

Gifts are normally tax-free if you survive for seven years after making the gift and are known as “potentially exempt transfers” (PETs). If you survive for fewer than seven years, tax will likely be payable, but the percentage due is tapered.

So, the earlier in life you make the gift the better.

Not only does it increase the chance that you’ll live long enough to make the gift tax-free, but you will also be around to see the good your gift can do. You might also find that your loved ones receive the money at a time that is more useful to them, for example, while they are trying to get onto the property ladder.

2. Using your HMRC exemptions

Small gifts

You can make as many small gifts – those up to £250 – as you like, as long as you haven’t used up the whole of a different allowance on the same person.

Your annual exemption

You can gift up to £3,000 tax-free in the 2023/24 tax year. This exemption is for an individual and you can carry forward unused allowance from the previous tax year.

If you and your partner didn’t use your exemption last year, you could gift up to £12,000 this year.

Use the regular gift from income exemption

You can give regular gifts, of whatever amount you like, from your income, as long as you can prove to HMRC that the money comes from your income, the gift is regular, and that you can make these regular gifts without damaging your standard of living.

3. Using your unused pension pots

Current rules mean that you can pass unused pension wealth onto a chosen beneficiary tax-free in some circumstances.

These rules, alongside the recent scrapping of the Lifetime Allowance (LTA), make your pension a useful part of your tax-efficient estate planning.

Unused pension pots are usually held outside of your estate for IHT purposes. Upon death before age 75, the whole of your unused fund can pass to a chosen beneficiary tax-free. If you die after age 75, your beneficiary can still receive your unused pension amount, but they will pay tax on it at the highest rate they pay.

The abolition of the LTA effectively removes the upper cap on how much you can save into a pension (within the Annual Allowance) so you might opt to keep a pension specifically to pass on in this way. You might also choose to leave your pensions until last, using non-pension income to support your retirement for as long as possible.

Note: Beneficiaries are chosen using an Expression of Wish from your pension provider, rather than via your will.

Get in touch

With IHT thresholds frozen for at least the next five years (on top of the two years from 2021) your naturally appreciating assets (investments or property, for example) could breach the nil-rate and residence nil-rate band in the future, meaning there will be IHT to pay on your estate.

If you would like help with calculating your potential liability, speak to us now. Get in touch by emailing or calling 03452 100 100.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

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.

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