Inheritance tax (IHT) in the UK is affecting more families than before.
Recent data shows that the number of deaths resulting in an IHT charge is at its highest level in five years. This increase comes at a time when families are already dealing with rising bills and economic pressures.
From April 2021 to March 2022, 4.39% of deaths in the UK led to an inheritance tax charge, up 0.66 percentage points from the previous year.
According to HM Revenue and Customs (HMRC), 27,800 estates were liable for this tax, 800 more than the previous year.
The total amount collected from inheritance tax rose by £230 million to £5.99 billion, a 4% increase.
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Factors Behind the Increase
A major reason for this rise is the government's decision to freeze the inheritance tax threshold at £325,000, unchanged since 2009.
Initially set to last until 2026, this freeze has now been extended to 2028.
As property values and other assets increase with inflation, more families are becoming liable for the tax.
Filing taxes | Pixabay
Although there were discussions about potentially reducing or eliminating the tax, these did not come to fruition.
Chancellor Rachel Reeves has suggested that tax increases could be part of the upcoming Budget in October.
While she has promised not to raise VAT, national insurance, or income tax, she did not rule out increasing inheritance tax or capital gains tax, causing concern for many families.
Understanding Inheritance Tax
Inheritance tax is levied on the estate of a dead person, covering their property, money, and possessions.
If the estate's value is below £325,000, no inheritance tax is due. If it exceeds this threshold, the tax is charged at a rate of 40% on the amount above the threshold.
For instance, if an estate is worth £400,000, the taxable amount would be £75,000 (£400,000 - £325,000), resulting in a tax bill of £30,000 (£75,000 x 40%).
Families can also benefit from additional allowances. If a home is passed on to children or grandchildren, an extra threshold of £175,000 applies, increasing the total tax-free threshold to £500,000.
Additionally, if a married couple or civil partners die, any unused threshold can be transferred to the surviving partner, potentially allowing for a combined threshold of up to £1 million.
Strategies to Reduce Inheritance Tax
There are ways to minimize the potential inheritance tax bill:
- The Seven-Year Rule: Gifts made more than seven years before death are typically exempt from IHT. If the donor dies within this period, the value of the gift may still be included in the estate but may qualify for taper relief, reducing the tax owed.
- Annual Gift Allowance: Each tax year, individuals can give away £3,000 worth of gifts without them counting towards the estate's value. This allowance can be carried over to the next year if not fully used.
- Gifts from Income: Regular gifts made from surplus income that do not affect the donor's standard of living can also be exempt from IHT. It is essential to keep a record of these gifts for tax purposes.
Looking Ahead
As the UK government faces budgetary constraints and rising public spending, the future of inheritance tax remains uncertain. With potential tax increases on the horizon, families may need to prepare for higher inheritance tax liabilities.
Understanding inheritance tax and planning ahead can help families manage these challenges.
Staying informed about current tax rates and exploring available allowances and exemptions can help ensure that loved ones are not left with unexpected tax burdens during difficult times.