Inheritance tax reform pressure mounts – but you can slash your bill right now

Pressure to abolish inheritance tax is mounting, with more than 50 Conservative MPs calling on Prime Minister Rishi Sunak to scrap the hated tax.

They have backed a campaign from the Conservative Growth Group that claims the proportion of homes under threat from the tax has more than doubled since the Conservative Party came into office in 2010, as more inheritors have to sell their deceased loved one’s homes to pay the tax.

Former Chancellor Nadhim Zahawi claimed that the levy is “morally wrong”. He wrote in The Telegraph: “Inheritance tax is that other spectre that haunts us alongside death.

“As well as being morally wrong to take someone’s assets on their death, it also creates all sorts of inefficient and damaging distortions in our personal finances and the wider economy.”

Rising prices for houses and other assets means more Britons are being hit by the levy. An inheritor has until six months has ended after the person’s death to pay the tax, which can be for tens of thousands of pounds.

Inheritance tax (IHT) is a 40 percent levy on any total inherited assets, above the value of £325,000 from a single person, or above £650,000 from a couple who were married or in a civil partnership.

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There is a further residential nil rate band if a person is inheriting the deceased person’s primary residence, of up to £175,000 for a single person and up to £350,000 for couples.

Ian Dyall, head of Estate Planning at wealth manager Evelyn Partners, warned that tax is hitting more Britons on middle incomes.

He said: “As the £325,000 IHT threshold called the nil-rate band has been frozen since April 2009, many more estates – in most cases of modest size in real terms – are being drawn into liability.

“Beneficiaries not usually considered well-off are facing tax bills, and this can be especially problematic if a property comprises the majority of the estate, leaving few liquid assets to foot the bill.”

IHT receipts hit a record £7.1billion in the past financial year, which was 17 percent more than in the previous year.

Britons face other tax increases this financial year as the tax-free allowance for capital gains tax (CGT) has been slashed from £12,300 to £6,000. The CGT threshold is being reduced to £3,000 from next April.

Mr Dyall said: “The increasing tax burden from frozen and reduced income tax thresholds – as well as the shrinking capital gains tax allowance – will make many households feel squeezed in the coming years, particularly against the background of a cost of living crisis.

“As income tax is very difficult to seek protection against, families will naturally try to make sure that they reduce or minimise tax liabilities in other respects.“And one of these will be the transfer of wealth. Those who feel they have paid enough tax on their earnings or assets will naturally try to take advantage of any allowances and strategies available which mean that when they die their beneficiaries will not be landed with unnecessary tax bills.”

People can reduce their IHT liability in several ways, including making gifts to reduce the size of their estate.

A person can also invest their funds in pensions, which are not considered to be part of a person’s estate for IHT purposes.

Mr Dyall spoke about some “lesser-known” ways people can reduce the tax bill their successors will face.

With regard to the additional residential nil band rate, this may apply even if the property was no longer possessed by the person when they died.

If a person owned their home after July 7, 2015 and sold it so they could downsize or move into a care home, their executors may be able to claim downsizing relief.

Mr Dyall said: “The assets that the relief is being claimed for do not have to be shown as directly accruing from the sale of the home, but you must leave sufficient money to children or grandchildren to cover the amount being claimed.

“And the property must have been your home at some point after July 7, 2015 and sold before you died.”

He also pointed to defined contribution pensions as a good way for a person to reduce their IHT liability.

Mr Dyall explained: “If you have used part of your pot to buy an annuity that will be counted as removed from the pension – just as any tax-free lump sum will be – although the annuity itself might have a death payout if you chose such a product.

“It is funds remaining in either a DC pension pot or in drawdown that could be useful in passing on wealth tax-efficiently.

“If you die before age 75, whoever inherits your savings pays no IHT and can also draw on the money with no income tax to pay.

“If you die after 75, your heirs still pay no IHT, but there will be income tax charges on withdrawals at their marginal rate.”

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