Understanding Inheritance Tax (IHT): 6 Strategic Approaches to Minimise Your Liability

Inheritance Tax (IHT) is an important consideration for anyone looking to pass on wealth to loved ones. With rising property values and tax thresholds remaining static, understanding IHT rules is crucial for effective estate planning. This blog will explain how IHT works, provide strategies to manage your bill, and incorporate key figures from HMRC and the Office for Budget Responsibility to give you a full picture of the tax’s impact across the UK.

What Is Inheritance Tax (IHT)?

Inheritance Tax is levied on the estate—property, money, and possessions—of someone who has passed away. The current IHT rate is 40%, which applies to the portion of the estate that exceeds the tax-free nil-rate band, currently set at £325,000 per individual. An additional Residence Nil-Rate Band (RNRB) of £175,000 can apply if you pass on your home to direct descendants, such as children or grandchildren.

Key Thresholds:

1. Nil-Rate Band: £325,000 (applicable across the UK).
2. Residence Nil-Rate Band (RNRB): £175,000 (for passing on the family home to direct descendants).

Together, a couple can potentially pass on up to £1 million without incurring IHT if they qualify for both the nil-rate band and the RNRB.

Key HMRC Figures on IHT

• Record Tax Receipts: In the 2022/2023 tax year, HMRC collected a record £7.1 billion in IHT, up from £6.1 billion the previous year. According to the Office for Budget Responsibility, this rise in receipts is largely due to property price increases and the freezing of tax thresholds.
• Only 4% of Estates Pay IHT: Although IHT is often in the public eye, it only affects around 4% of estates across the UK. This is due to the relatively high nil-rate band, though rising house prices are pushing more estates over the threshold.
• Frozen Nil-Rate Band: The £325,000 nil-rate band has been frozen since 2009 and will remain so until April 2028, despite inflation and increasing property values, which means more estates are subject to IHT.
• Property Prices and IHT: The average house price in the UK was over £286,000 in 2022, but in high-value regions like London and the South East, it’s much higher. This, combined with the frozen threshold, has led to more families facing significant IHT bills.

Managing Your IHT Bill: UK-Wide Strategies

Here are six strategies to reduce your IHT bill:

1. Utilise Gifting Allowances: You can gift up to £3,000 per year without it being added to your estate. Other allowances include small gifts of £250 per person and wedding gifts.
2. Establish Trusts: Trusts can help reduce your IHT exposure by removing assets from your estate. However, they can be complex and may incur tax charges if assets exceed the nil-rate band.
3. Leave a Charitable Legacy: Assets left to a charity are completely exempt from IHT. If you leave 10% or more of your estate to charity, the IHT rate on the remaining estate is reduced from 40% to 36%.
4. Make Use of Business Property Relief (BPR): Certain business assets may qualify for BPR, reducing their value for IHT purposes by up to 100%.
5. Life Insurance Taking out a life insurance policy to cover your IHT bill can ensure your heirs don’t need to sell valuable assets. Make sure it’s written in trust to avoid it being included in your estate.
6. Maximise the Residence Nil-Rate Band: If you plan to pass on your family home to children or grandchildren, ensure you utilise the RNRB, which can add up to £175,000 to your tax-free allowance.

Early Planning Across the UK

While the rules governing Inheritance Tax are largely uniform across the UK, certain differences in legal rights, property ownership, and estate administration—particularly in Scotland—mean that it’s essential to consider these nuances when planning your estate. Proactive planning, including making use of exemptions, allowances, and trusts, can significantly reduce your IHT bill, ensuring more of your wealth is passed on to your loved ones rather than the taxman.

Take Action: Plan Your Estate with Wells Gibson

Inheritance Tax planning can be complex, but it doesn’t have to be overwhelming. At Wells Gibson, we specialise in helping individuals across the UK manage their wealth, minimise their IHT liability, and protect their legacy for future generations.

Visit Wells Gibson to learn more about how we can help you develop a comprehensive estate plan tailored to your specific needs, ensuring your wealth benefits those you care about most.

Disclaimer

The information provided in this blog is for informational purposes only and should not be considered as legal, financial, or tax advice. While we strive to provide accurate and up-to-date information regarding Inheritance Tax (IHT) and estate planning, tax laws and regulations can change, and individual circumstances vary. Therefore, we recommend that you consult with a professional before making any decisions related to your estate planning or tax strategies.

Wells Gibson makes no representations or warranties regarding the accuracy, completeness, or reliability of the information contained in this blog. We are not liable for any losses or damages that may arise from the use of this information. Your use of this blog signifies your acceptance of this disclaimer.