In recent times, speculation has surrounded the fate of UK Inheritance Tax (IHT), with discussions centring on the possibility of its abolition in the upcoming budget by Jeremy Hunt. This has led some to question the relevance of effective planning in this area. However, Labour leader Keir Starmer has added a layer of complexity by confirming that, should the Conservative Party eliminate IHT, he would reinstate it if elected to power. The potential political fluctuations add urgency to the need for thoughtful and proactive financial planning.
Starmer’s commitment to reinstating IHT gains significance in the context of current opinion polls, where his party holds a substantial lead. According to The Guardian, GB voting intentions indicate Starmer at 43.6%, overshadowing Rishi Sunak at 24.4%, suggesting a possible change in government and policies.
IHT, notorious for its 40% tax rate on the estate value over the nil-rate band (NRB), stands as one of the highest penal rates in the UK taxation system. Despite this, tax experts often refer to it as an “optional tax” due to the multitude of planning options available to mitigate or eliminate it. However, as per HM Revenue & Customs, over £5.7 billion was collected in IHT receipts from April to December 2023, indicating a substantial under-utilisation of effective tax planning. At this rate, the total is projected to surpass the all-time high of £7 billion in the 2022/23 tax year.
The rise in IHT receipts can be attributed to several factors, with one significant contributor being the appreciation of UK real estate. Regardless of an individual’s location, UK real estate remains subject to IHT. Between 2009 and now, the average house price in the UK has surged by 68.21% (Nationwide House Price Index), while the NRB has remained stagnant at £325,000, resulting in an effective increase in the tax rate. The freezing of the NRB until at least April 2028, as confirmed by The Chancellor, further compounds the challenge.
A stark contrast emerges when comparing the treatment of IHT with other taxes. While HMRC has increased the Personal Allowance for Income Tax purposes by 94% to keep pace with inflation, the IHT NRB has not seen any such adjustments. This suggests that individuals must take proactive measures to mitigate IHT, as waiting for governmental intervention may prove futile.
Effective planning is essential for mitigating IHT and preserving accumulated wealth for future generations. Key reasons for planning include tax efficiency, business succession, minimising tax liability through the strategic use of government allowances, lifetime gifting, and trust planning.
Tax Efficiency
Mitigating IHT can help preserve the wealth that has been accumulated over a lifetime, allowing more of it to be passed on to heirs rather than being subject to taxation. Families may want to protect their assets to ensure that future generations can benefit from the family’s financial success.
Business Succession Planning
For individuals with business assets, proper planning can help facilitate the smooth transfer of these assets to the next generation without triggering excessive IHT liabilities. When the value of the family business is included in the estate, planning ahead can help ensure the continuity of family businesses by minimising tax burdens on the transfer of business assets.
Minimising Tax Liability
Individuals may explore various strategies and allowances provided by the government to legally minimise their IHT liability. This can include taking advantage of exemptions, reliefs, and allowances available under the law. The UK has various allowances and exemptions that can be utilised to reduce the taxable value of an estate. These may include the nil-rate band, residence nil-rate band, and other specific exemptions for certain types of assets or transfers.
Lifetime Gifting
Making gifts during one’s lifetime can be a strategy to reduce the taxable estate. There are rules and limitations on the value and frequency of gifts, but lifetime gifting can help transfer assets to heirs tax-efficiently.
Trust Planning
Setting up trusts can be a way to manage and distribute assets while potentially minimising IHT. Certain types of trusts offer tax advantages, and they can be tailored to meet specific family needs and circumstances.
While there are many methods of eliminating or reducing IHT, the vital factor in the majority of cases is planning. If you do not plan ahead, many of the reliefs will no longer be available to you due to rules surrounding gifting periods.
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