The Abolishment of IHT That Never Was…

The slashing of Inheritance Tax (IHT) in the 2023 Autumn Budget failed to materialise as anticipated by the media. It had been suggested that the Chancellor either intended to cut the 40% rate or raise the Inheritance Tax threshold.

It is widely believed that Jeremy Hunt made this U-turn due to the IHT levy set to raise nearly £10 billion a year by the end of the decade. The Office for Budget Responsibility revealed that the £7.1 billion tax levy in 2022-23 is forecast to hit £9.8 billion by 2028-29, a 38% increase.

What is IHT?

In very simple and basic terms, IHT is a tax on the estate (the property, money and possessions) of someone who has died.

There is normally no IHT to pay if either:

• The value of your estate is below the £325,000 threshold, or
• You leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club

You may still need to report the estate’s value even if it’s below the threshold.

If you gift your home (via your will) to your children (including adopted, foster or stepchildren) or grandchildren, your threshold can increase to £500,000 (if certain criteria are met).

If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die.

Inheritance tax rates

The standard IHT rate is 40%. This is only charged on the part of your estate that is above the threshold.

Example

Your estate (which does not include a property) is worth £400,000 and your tax-free threshold is £325,000. The IHT charged will be 40% of £75,000 (£400,000 minus £325,000).

The estate can pay IHT at a reduced 36% rate on some assets if you leave 10% or more of the ‘net value’ to charity in your will. (The net value is the estate’s total value minus any debts.)

Reliefs and exemptions

Some gifts you make while you are alive may be taxed after your death. Depending on when you gave the gift, ‘taper relief’ might mean the IHT charged on the gift is less than 40%.

Other reliefs, such as Business Property Relief and Agricultural Property Relief allow some assets to be passed on free of IHT or with a reduced bill. 

Who pays the tax to HMRC?

Funds from your estate are used to pay IHT to HM Revenue and Customs (HMRC). This is done by the person dealing with the estate (called the ‘executor’, if there is a will).

Your beneficiaries (the people who inherit your estate) do not normally pay tax on their inheritance. They may have related taxes to pay, for example if they get rental income from a house left to them in a will.

People you give gifts to might have to pay IHT, but only if you give away more than £325,000 and die within seven years of those gifts.

How could the burden of IHT be eased in the future by a Government?

Reduce the rate of IHT from 40% to 20%. It has been estimated this could save the taxpayer £15.4 billion over the next three years.

The current IHT threshold has not been increased since 2009 when inflation was considerably lower. The IHT threshold could be increased to £500,000 for every individual rather than simply increasing the threshold for those leaving their home to their children. Raising the threshold would mean than an estimated 12,500 estates would not be liable to IHT.

What can I do in the meantime?

Lanyon Bowdler recommend reviewing your will at least every three to five years to ensure that it still caters for your needs and wishes.

Our Private Client Team is highly experienced and ranked as Tier Two in The Legal 500 and Band One in Chambers UK HNW guide. With extensive experience in tax planning and wealth preservation we can ensure that your will is prepared in the most tax efficient manner taking the ever changing tax laws, including IHT, into consideration.