How can I reduce Inheritance Tax (IHT) for my loved ones?
Inheritance tax (IHT) is now catching more estates than ever before and is currently boosting the Treasury’s coffers by record amounts.
Widely hated, dubbed ‘morally wrong’ by some and a stealth tax by others, IHT is a levy on your estate after you die, also known as ‘death duties’.
Viewed historically as a tax affecting only the wealthiest, continually frozen tax thresholds, elevated house prices and probate delays mean that a growing number of ordinary families are now falling into its net:
- IHT receipts for April 2023 totalled £597 million - £90 million higher than the same period last year.
- In 2022/23, the Treasury collected £7.1 billion in IHT compared to £5.3 billion in 2020/21.
- The Office for Budget Responsibility predicts IHT receipts will reach £7.2 billion before April 2024 and as high as £8.4 billion by 2027/28.
Why do the current probate delays mean more IHT is being paid?
Probate is the legal right to deal with someone’s money, property and possessions (their ‘estate’) when they die.
The Probate Registry is currently taking a lengthy 16 weeks – at least – to process probate applications causing further stress and upset for bereaved families when it comes to IHT.
The hold-up means:
- Some estates affected by a delay of more than one year are no longer able to claim valuable IHT share loss relief on qualifying investments – such as shares or securities – that were part of the deceased’s estate and sold at a loss.
- Interest at a daily rate – and currently at a 15-year peak of 7.5% - is charged on IHT which isn’t paid within six months of a person’s death, unfairly reducing the value of the estate funds for beneficiaries.
- Properties which cannot yet be sold – because probate must be granted for this to happen – could end up falling in value as interest rates rise and the property market falters. If there is a drop in valuation between the probate valuation and the sale price, IHT paid on the higher value will have to be reclaimed from HMRC.
What are the current tax thresholds for IHT?
Everyone has a tax-free allowance for IHT known as their Nil Rate Band which currently stands at £325,000.
There is normally no tax due when the estate value is below this threshold – or if you leave everything above the threshold to your spouse or civil partner – but otherwise, the standard 40% IHT rate applies.
The government has frozen the threshold above which people must pay IHT for another two years, until 2028. It has been stuck at this rate since 2009 when inflation was considerably lower.
With inflation now soaring, the freeze means yet more estates will face an IHT bill because with higher property prices, the tax-free allowance doesn’t go as far as it used to.
It also means that estates which fall into the 40% bracket will have to pay even more to the taxman.
How do I make sure my Will makes best use of any allowances?
It makes sense to ensure your Will is structured in a way that uses any available allowances to best effect.
For instance, if you’re leaving property to a family member, the Main Residence Nil Rate Band may also apply which is an additional tax-free allowance of £175,000.
There are other exemptions and allowances for certain estates including the transferable spouse exemption (on the death of the second spouse or civil partner) and business property relief.
How else can I mitigate my IHT position for my beneficiaries?
The rules around inheritance tax, or death duties, can seem complicated and confusing but there are effective ways to dramatically reduce the impact on your estate for those you leave behind.
Planning ahead is key as it gives you more options, including:
- Thinking about who you’d like to benefit from your estate when you die and any implications.
- Making a Will to take wealth preservation steps which structure your affairs to minimise your IHT liability and maximise tax relief. Without a Will, your estate will be distributed in line with the laws of intestacy which may mean your family don’t inherit as much as you want them to or indeed, anything at all.
- Considering making gifts to charity which are completely exempt from IHT. If your estate is liable for IHT and you leave 10% of it or more to charity, then a reduced IHT bill of 36% may be applicable to the rest of your estate.
- Looking at gifting money and property to your beneficiaries before you die. Any gift of a cash or lump sum is free from IHT as long as you live for seven years after making it but if certain strict requirements are not met, the gift could forfeit its IHT exemption.
- Seeking specialist advice to inform your decisions is key. For example, Gifting the family home, to your children while continuing to live in it might seem like the perfect solution but this is known as a ‘gift with reservation of benefit’ and unfortunately, can still have IHT consequences.
Get in touch
At Wards Solicitors’, our Wills, Probate and Mental Capacity team is highly experienced and ranked as a leading firm in the South West in the 2023 edition of the independent Legal 500 guide.
With extensive experience in tax planning and wealth preservation, our lawyers can help you make or update a correctly drawn Will, an inexpensive way of avoiding difficulties for your loved ones when you die. It also ensures you don’t miss out on fast changing tax laws, including IHT, which could save your family money in death duties.