INHERITANCE AND IHT: FAMILIES, PLANNING AND BRITAIN’S MOST HATED TAX

In these days of seemingly polarised opinions on a range of topics, there are few things which seem to unite people. 

One, however, is Inheritance Tax (IHT). 

A briefing paper published by the House of Commons’ Library in March underlined how “inheritance tax is the most unpopular tax in the UK”, according to various polls (https://commonslibrary.parliament.uk/research-briefings/sn00093/). 

Of course, opinions can be swayed by presentation and perspective. The views of certain well-known commentators and media can affect how the rest of us regard this and many other taxes. 

So, it’s always useful and, I would say, important to look at source material whenever it appears. 

At the end of last month, HMRC not only published its annual report and accounts (https://www.gov.uk/government/publications/hmrc-annual-report-and-accounts-2023-to-2024/hmrcs-annual-report-and-accounts-2023-to-2024-performance-overview) but a wealth of data which allows us to see the background to its IHT receipts. 

Even though these very detailed figures only give us access to the picture up to the financial year 2021-’22, they are still illuminating (https://www.gov.uk/government/statistics/inheritance-tax-liabilities-statistics/inheritance-tax-liabilities-statistics-commentary) 

The most important element for many individuals will be the headline numbers showing that IHT during the 12 months in question rose to another record high of £5.99 billion – up four per cent or £230 million on the previous year. 

Nevertheless, if we look a little more closely we see significant patterns emerge. 

One is that only just over four per cent of deaths resulted in estates having to pay IHT. 

Now, that still represents a rise of two-thirds of one per cent in a year but it means that the tax is payable by fewer than one-in-20 estates. 

HMRC has explained that the increase is primarily due to “continued rises in asset values” and the fact that there has been no movement in the threshold at which IHT becomes payable – known as the Nil-Rate Band – for the last 15 years. 

Neither of those points can be questioned. 

The latest information from the Land Registry shows that the average price of a home in England during June was £305,370 – 90 per cent higher than when the Nil Rate Band was last adjusted in April 2009 (https://landregistry.data.gov.uk/app/ukhpi/). 

The increase is even more marked in London, where average house values have risen from £245,351 to £523,134. 

That means many families trying to organise their financial affairs in order to mitigate IHT already find themselves above the limit at which it becomes payable. 

That threshold of £325,000 has been in place for longer than any other such ceiling and will continue until April 2028 at its current level (https://www.gov.uk/government/publications/rates-and-allowances-inheritance-tax-thresholds-and-interest-rates/inheritance-tax-thresholds-and-interest-rates). 

Nevertheless, as inflexible as it remains, I believe that with sound financial planning, there is no reason why families cannot keep their IHT exposure to a minimum. 

It is particularly true for couples who are either married or in a civil partnership and have at least one child. 

That is because a husband or wife’s Nil-Rate Band entitlement of £325,000 can be taken up by their spouse on their death.  

HMRC has revealed that what is referred to as the Transferrable Nil-Rate Band was used by 34 per cent of estates whose values exceeded the Nil-Rate Band in 2021-’22 and accounted for a total exempted amount of £15.5 billion. 

Furthermore, there is another exemption called the Residence Nil-Rate Band under which someone leaving their own home to a spouse or direct family member is entitled to £175,000 worth of IHT relief. 

Combining both exemptions, it means that a married couple can amass joint relief of £1 million before IHT becomes an issue. 

Yet that is not all. 

Even relatively straightforward estate planning can be of enormous benefit. 

People can use things like their annual gifting allowance of £3,000, make charitable donations, make investments which qualify for business relief, such as those which invest in businesses listed on the Alternative Investment Market (AIM), or take part in the Enterprise Investment Scheme (EIS). 

If someone survives such latter investments for two years, the amounts involved sit outside their estates and, therefore, are not liable to IHT. 

It shows that even without the kind of complex structures some observers associate with the process of estate planning, IHT need not necessarily be a headache. 

That said, it is clear that IHT remain an ongoing concern. 

Two weeks before HMRC issued its very detailed IHT breakdown, it published its latest set of monthly receipts for the entire range of taxes which are in place (https://www.gov.uk/government/statistics/hmrc-tax-and-nics-receipts-for-the-uk/hmrc-tax-receipts-and-national-insurance-contributions-for-the-uk-new-annual-bulletin#inheritance-tax). 

They indicated that the amount of IHT due to the Treasury up to April this year has increased by 120 per cent over the last decade – from £3.402 billion to £7.499 billion. 

Against that backdrop, it is arguably imperative to take proper financial and legal advice to ensure that whatever measures are embarked upon to reduce possible IHT liabilities do not prove ultimately unsuccessful by leaving people open to challenges by the Revenue. 

ENDS