HMRC collected £6.1 billion in Inheritance Tax
How does this compare to previous years?
The £6.1Bn represents a 14% jump on the previous years collected. This is the single largest rise since the 2015-16 financial year. The average IHT bill has increased by £7,000 per estate.
Let’s look at the main issues around inheritance tax, who is most likely to pay it and the different ways to reduce your bill.
Why are we paying more?
IHT is paid on the estate of someone who has died based on the total value of their assets. The estate includes all their property, possessions, savings and investments.
Everyone in the UK is entitled to a tax free IHT allowance, which is currently at £325,000. If the value of your estate exceeds this, it may be subject to IHT at a flat rate of 40%.
HMRC recently added a residence nil-rate band which is an extra allowance on the main home. This was first introduced in 2017 and is now worth £175,000 per person. It can be used when you leave your home to a direct descendant but may be taken away from you if your estate is worth more than £2million.
The current allowances will remain frozen up until 2026. The Office for Budget Responsibility have predicted that the annual IHT intake for HMRC may rise to £8.3bn by then. A major factor in this increase in tax is due to property prices rising which means that a number of people who weren’t affected by IHT may soon find themselves exceeding the estate allowances.
How can you reduce IHT?
There are several ways to minimise how much IHT is paid to HMRC.
If you are married or civil partnership, you can effectively double the above allowances. This is because spouses don’t pay IHT on assets left to their partner on the first death. The surviving partner will also inherit the unused IHT allowance on the first death. This could mean a married couple can pass on an estate worth up to £1m tax free after they die.
You can give money away as a gift during your lifetime as a simple step to take which will help reduce inheritance tax. No tax will be due on gifts you give so long as you live for seven years after giving them. If you pass away within the time frame, the IHT may be reduced by way of taper relief if you survive for 3 years from the date of making the gift.
There is an annual exemption worth up to £3,000 each year without it being subject to IHT charge, which can be split between as many people as you like. You can also make unlimited gifts of up to £250 to others as long as you have not used another allowances on the same person. You can carry over any unused annual exemption to the next tax year but for only 1 year.
You can also gift up to £5,000 for your child’s wedding and up to £2,500 for a grandchild’s wedding and up to £1,000 for anyone else.
If you give money to UK charities, political parties, National Trusts, registered housing associations, national museums and universities you don’t have to pay inheritance tax. If you leave more than 10% of your taxable estate to the above groups, your inheritance tax for the rest of your estate will fall from 40% to 36%.
Other ways to reduce IHT whilst keeping control of your assets
Where the above do not sufficiently reduce your IHT liability, or you want to do so but still can control of your assets, here at Signature Tax, we provide a broad range of Inheritance Tax services from Family Investment Planning to creation of wills and Islamic wills and Education Trusts.
Please get in touch with us if you need help in this area.
Contact us or share on: