HMRC raked in a staggering £2billion in inheritance tax (IHT) receipts from April 2023 to June 2023, reflecting a £200million increase from the same period a year earlier.
New data shows the number of families paying IHT increased by 17 percent in the 2020 to 2021 tax year, with average bills hitting £214,000.
Emma Florentin-Lee, partner, chartered accountant and tax adviser at Oury Clark said: “While the rates and thresholds in relation to IHT have been stable for many years and indeed are now frozen until 2027/28, inflation has meant that the value of assets in your estate is likely to have increased, particularly residential property.”
She said that, with thresholds not increasing in line with inflation, more assets are now falling into the inheritance tax net.
The nil-rate band, which is the amount a person can pass on after death tax-free, has been frozen at £325,000 since 2009. If the value of an individual’s estate exceeds this, a 40 percent tax rate is applied to the rest.
Ms Florentin-Lee added: “Some see [the frozen thresholds] as a sneaky ploy by the Government to increase IHT bills without taxpayers noticing and without the negative headlines of tax rises.”
However, there are ways to reduce the IHT burden and pass on more to loved ones, if planned effectively. Ms Florentin-Lee told Express.co.uk one of her “go-to” recommendations for relieving inheritance tax (IHT) is gifting from surplus income.
Ms Florentin-Lee explained: “As you likely know, normally gifts are subject to the seven-year rule whereby they only fall out of IHT after seven years.
“But regular gifts out of your surplus income fall entirely outside the scope of inheritance tax from the date the gift is made.”
However, she noted the “critical” point here is that the person making these gifts needs to have sufficient income each tax year after taxes, living costs, etcetera.
Ms Florentin-Lee said: “Any spare income can be given as gifts to individuals and, as long as these gifts are expected to be regular, the gifts fall within this exemption.”
Business property relief is also a “valuable relief” from inheritance tax, according to Ms Florentin-Lee.
She said: “Look out for any reliefs that can be applied to someone’s assets upon death, such as business property relief.
“There are various investment funds which invest solely in companies that qualify for business property relief, therefore your investment in these investment schemes would fall outside the scope of inheritance tax after two years of ownership.”
Ms Florentin-Lee noted that, although the rate of IHT is 40 percent, the average rate paid in the 2020/21 tax year was 13 percent due to the “sheer number” of allowances and reliefs available. Therefore, those who structure their affairs “efficiently” and take advantage of the various reliefs available will be able to reduce the IHT burden.
Additionally, if an estate has not been left in the most tax-efficient manner, Ms Florentin-Lee said it’s possible to “vary” a will for up to two years after the date of death. According to the tax expert, this would allow a new will to be put in its place, which can be drawn up to take advantage of the available tax efficiencies.
She added: “If any IHT is due upon an individual’s death, the executors – those appointed to sort out the estate – have six months from the date of death to pay the IHT bill. This isn’t very long, especially at what is likely to be a very challenging time.
“HMRC also charges interest on late IHT payments, which is now at a rate of 7.5 percent, only adding to the inheritance tax burden.
“There are also exemptions for some gifts, beyond those made out of surplus income, like the £3,000 annual exemption which can be carried forward a year if not used. As well as special allowances for gifts made to someone in the event of their marriage.”
Find out more about additional exemptions and efficient tax tips in Express.co.uk’s inheritance tax guide.
