Inheritance tax (IHT) is payable on the value of a person’s estate who has passed away, above a certain threshold – usually £325,000. The levy is currently set at 40 percent, with many people looking for legal ways to avoid paying IHT. However, experts have expressed concern that increasing property prices mean many more people will find themselves above the threshold – and thus subject to taxation.
The UK House Price Index released today showed an annual rise in property prices of 8.9 percent.
While this could be good news for economic activity, namely those looking to sell, many will have to leave their loved ones with a hefty tax bill which could significantly cut down what is ultimately received by beneficiaries.
There is, however, a nil rate band and a residence nil rate band which can provide somewhat of a financial buffer for Britons.
Nonetheless, the issue was highlighted by Ian Dyall, Head of Estate Planning at Tilney, who offered further insight on the matter.
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He said: “Rising property prices and any prospect of IHT reforms will be a real concern for many families, particularly if for those forced to the sell homes of loved ones or other assets to pay a large inheritance tax bill.
“In addition to the nil rate band, the residence nil rate band is an allowance for passing on the family home. It is currently £175,000 and can be transferred between spouses and civil partners.
“The allowance is tapered down for people with larger estates, reducing by £1 for every £2 that the estate is valued at over £2 million. The residence nil rate band can only be used when passing on a residence to direct descendants and applies only to your home, not a buy-to-let property.”
Mr Dyall also expressed worry about the future of IHT, and with the Chancellor recently announcing a freeze to nil rate bands until April 2026, more and more people may have to confront the reality of paying IHT.
He highlighted HMRC monthly data which showed IHT receipts climbed to £0.5 billion, which was £0.2billion higher than the same period last year.
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This, he said, continues to prove IHT as a big earner for the Treasury, which could even be increased in the future to help the economy post-pandemic.
For those people, then, who are looking to manage, reduce or eliminate their Inheritance Tax bill, there will be certain steps to take.
Firstly, Mr Dyall recommends exploring the idea of passing on one’s pension, due to the fact the pots are not included when an IHT bill is calculated.
For individuals who can afford to leave a pension relatively untouched, funding their retirement with other means, passing on a pension could be a good, tax-efficient move.
Those who pass away before 75 can have their beneficiaries withdraw without paying any tax.
However, dying after 75 means the beneficiary will pay tax at their marginal income tax rate.
Another key point to consider is making a gift in the form of a trust.
As Mr Dyall highlights, a trust enables Britons to provide gifts to others while still being able to keep control of the money.
A trust can be useful in a number of circumstances and can help beneficiaries who are too young, too inexperienced, or in ill health.
In addition, those going through divorce or bankruptcy may benefit from the trust as this sum is shielded.
Finally, tax-efficient investments can be used to benefit from Business Relief – a “clause” of sorts within Inheritance Tax rules.
Business Relief allows individuals to potentially reduce the value of their Inheritance Tax bill by owning or investing in a business.
This relief can be claimed on a number of businesses, land, or unquoted shares.
It is worth noting, though, that assets must be owned for at least two years before they become eligible for Business Relief.
Some assets are totally free from IHT with these rules, while others will only receive 50 percent relief.
As the rules on Business Relief, and indeed IHT as a whole, can be complicated, individuals are encouraged to speak to a financial adviser.
These individuals can often offer tailored and more in-depth guidance to suit a person’s circumstances.