Why Inheritance Tax is more likely to affect you than you think

Inheritance Tax (IHT) is often considered a tax for the wealthy, and you may think that it doesn’t apply to you. But the reality is the threshold for IHT is lower than many people realise, and you can easily get caught out.

According to Professional Adviser, IHT receipts are predicted to increase by £3 billion by the 2027/2028 tax year and an estimated 1 in 15 deaths will trigger an IHT payment. Ultimately, this means you are more likely to be affected than you may think.

It is important that you assess the value of your estate regularly to determine if your family are likely to have to pay IHT. In some cases, you may be able to make changes – like gifting or increasing pension contributions – to reduce your IHT liability and pass more of your wealth to your loved ones.

Read on to learn more about when IHT is triggered, why you are more likely to be affected by the tax in the future than you think, and how you can reduce your IHT bill.

IHT may be due if the total value of your estate is over £325,000

IHT may be due if the total value of your estate, including property and other assets – but not usually your pension – is more than the ‘nil-rate band’ of £325,000.

However, if your overall estate is worth less than £2 million, you may also benefit from the ‘residence nil-rate band’ if you pass your main home on to your children or grandchildren when you die. This adds up to £175,000 to your IHT threshold, effectively increasing your nil-rate band to a potential total of £500,000 per person.

You can also pass on unused nil-rate bands to your spouse or civil partner. So, if you pass away and leave everything to your spouse or civil partner, they could potentially pass on up to £1 million – using their allowances and yours – to your loved ones without any IHT.

That said, this is not always possible, and your family may face IHT at a rate of 40% on anything over the threshold. This can add up to a significant portion of your estate that your family loses to IHT.

You may assume that you don’t need to be concerned about IHT because your estate is not worth enough, but it is easier than you may think to reach the threshold, even if you benefit from all the available allowances.

Increased estate values and frozen IHT thresholds mean more people may be affected

You may be more likely to be affected by IHT in the future because of frozen IHT thresholds and rising estate values.

According to the Office for National Statistics (ONS), the average house price in January 2023 was £290,000, which may already put you quite close to the threshold before the rest of your assets are considered.

More importantly, property prices increased 6.3% in the 12 months to January 2023, and other assets may rise in value too. For example, you may be generating returns on an ISA or from stocks and shares. What this means is that the overall value of your estate may increase significantly in the coming years.

However, IHT thresholds have been frozen at the 2023/24 level until April 2028. So, as the value of your estate is likely to increase, more of your wealth could exceed the nil-rate bands.

As a result, IHT receipts are expected to increase substantially in the future and your family may be more likely to get a big tax bill when you pass away.

Forward planning may help you reduce IHT liability

Although IHT receipts are on the rise, there are ways to potentially reduce the IHT liability on your estate. And, if you plan early, you may be able to pass on more of your wealth to loved ones.

If you give assets as a gift, they will usually be exempt from IHT, provided you survive for seven years after you make the gift. Each individual can also give up to £3,000 a year in gifts and this amount will immediately fall outside of your estate for IHT purposes.

You can also gift up to £5,000 for a child’s wedding and this amount will also fall outside your estate.

Trusts are another possible strategy for reducing IHT. Putting assets into a trust can mean that they are no longer considered part of your estate, so they are exempt from IHT. There are several types of trust and the rules surrounding their use can be complicated, so seeking professional advice really is essential before taking this route.

Charitable donations can also be an effective way to contribute to a good cause while reducing the IHT that your family is likely to pay.

Any charitable donation is normally not considered part of your estate for IHT purposes, and the rate of IHT is reduced to 36% if you leave at least 10% of your estate to charity.

These are just some of the ways that you could potentially reduce the amount of IHT your family have to pay. Planning ahead is crucial here because the more time you give yourself, the more options you have.

Get in touch

If you are concerned about the IHT on your estate and you want to explore options for reducing it, we can assist you.

Email hello@fcadvice.co.uk or call 0330 828 4714.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate planning, tax planning or Will writing.