Inheritance tax is often been described as the most hated taxes in the UK but often-mooted reform has failed to materialise.
However, with Prime Minister Rishi Sunak reportedly considering cutting inheritance tax (IHT) ahead of general election, our expert Wills and Probate team decided to examine IHT in detail.
Reform of the tax, which sees up to 40% of the deceased non-exempt assets taxed, is up for a "live discussion" at the highest level, according to the Sunday Times, which could eventually see the eventual abolition of inheritance tax. Among the proposals for consideration is to reduce the 40 per cent IHT rate, making it easier to abolish in later years.
Duncan Lewis solicitors possess significant expertise in the area of wills, probate and tax law, advising on a full range of contentious trust, probate and tax matters. This article will discuss how inheritance tax works and the effect its abolishment would have, as well as the best ways to minimise your inheritance tax burden.
How IHT works
Inheritance tax is a tax on the value of the deceased 'net estate', i.e. it is a tax on the value of all the assets they own, less all the debts that they have, after accounting for exemptions. Gifts made within seven years of the death of the donor are also included as part of the donor's estate, while those made more than seven years before death are not included, with lower rates applicable for gifts made three or more years in advance of death. Where assets are transferred to a spouse or civil partner, they are generally exempted. Furthermore, there is no tax on the first £325,000 of net assets, while a 40% rate applies above this 'nil-rate band'.
There is an extra £175,000 'residence nil rate band' allowance towards the deceased main residence, as long as the property is passed to direct descendants. The implication of this is that for many older people, there is no tax on the first £500,000 of net assets. For states valued at more than £2 million, the residence nil-rate band is tapered away. For every additional £1 the estate is worth above £2 million, the residence nil-rate band is reduced by 50p, effectively increasing the marginal tax rate on each £1 of assets to 60p between £2 million and £2.35 million.
The Effect of Abolishing IHT
Inheritance tax is arguably the UK's most disliked tax, with a recent YouGov Poll establishing that just 20% of people deemed inheritance tax 'fair' (see Ansell (2023)), arguing that the tax improves equality of opportunity and, in particular, reduce gaps in economic resources between those with more and less wealthy parents.
According HMRC National statistics, we can see the contribution of Inheritance tax in the UK revenue. In the tax year 2020 to 2021, 3.73% of UK deaths resulted in an Inheritance Tax (IHT). IHT tax liabilities created in respect of the tax year 2020 to 2021 were £5.76 billion. This was a rise of £0.8 billion (16%) compared to the previous year. While the Office for Budget Responsibility (OBR) forecasts that revenues will rise from £7.2 billion in 2023–24 to £8.4 billion in 2027–28 (worth £8.2 billion in 2023 prices), abolishing IHT would currently mean forgoing an estimate of £7 billion annually in revenues.
How can I reduce my inheritance bill?
Here are concise ways to reduce your inheritance tax (IHT) bill:
1. Write a Will:
- Create a will to dictate asset distribution
- Appoint a lawyer for complex situations
- Leaving 10% to charity reduces family IHT from 40% to 36%
2. Seek Financial Advice:
- Consult a regulated financial or tax adviser
- Ensure expertise in IHT planning.
3. Spend Your Money:
- Reduce taxable estate by spending or gifting
- Gifts up to £3,000/year are IHT-free
- Be mindful of the seven-year rule
- Property gifting has specific rules
Planning early and understanding IHT rules can safeguard your assets. Consult experts for tailored guidance.
Originally published 01/11/2023
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.