Partner Louise Nelson, in our Wills, Probate Tax & Trusts team, looks at the latest data shared by HM Revenue & Customs (HMRC) and offers a reminder of the importance of lifetime tax planning.
Recently released figures from HMRC show that Inheritance Tax (IHT) receipts for the first eight months of the financial year, April 2024 to December 2024, totalled £6.3 billion - a £600 million increase compared to the same period the year before. In total, IHT receipts in the 2023/24 financial year amounted to £7.4 billion.
According to the Office for Budget Responsibility (OBR), IHT is expected to raise £8.3 billion this financial year and as much as £13.9 billion by 2029/30, as a greater number of estates become liable to pay more IHT.
Whilst property prices and the value of other assets continue to rise, the nil rate band (the value above which IHT becomes payable) has remained unchanged at £325,000 since 2009 and will do so until at least 2030. Despite the introduction of the residence nil rate band from April 2017, (which is available to some estates provided certain conditions are met), more estates are being brought within the scope of Inheritance Tax. From April 2027, unused pension savings (i.e. a pension which hasn’t been used to claim an income such as an annuity product and savings in a pension pot that have been designated to a Flexi Access Drawdown Account) are likely to be taxed as part of an estate although details of how this will work in practice haven’t yet been finalised. Including these assets in the estate may preclude many estates from being eligible for the residence nil rate band.
What is Inheritance Tax?
Inheritance Tax (IHT) is a tax on the estate of a person who has died, including all property, possessions and money.
IHT typically accounts for under 1% of the Government’s annual tax take, yet it is perhaps one of the most disliked and debated forms of taxation and one that can have a significant impact on the beneficiaries of an estate.
According to the latest data available from HMRC, fewer than one in 20 estates, or around 4%, currently pay Inheritance Tax. However, the proportion of estates subject to IHT is forecast by the Institute for Fiscal Studies (IFS) to rise to around 7% by 2032.
When I Die, Will Inheritance Tax Have to Be Paid on My Estate?
Every individual has an Inheritance Tax-free allowance of £325,000, known as the Nil Rate Band (NRB). Estates valued below the NRB threshold will not incur Inheritance Tax, whilst those above it will be subject to IHT, charged at a rate of 40% on the portion of the estate in excess of the threshold, where no exemption applies.
For example, if a person’s estate is valued at £400,000, Inheritance Tax would only apply to the portion of the estate above the NRB threshold of £325,000, in this case £75,000, again where no exemption applies.
Any lifetime gifts made by a person within seven years of their death which exceed the small gifts allowance, annual allowance or which do not qualify for the gifts out of surplus income exemption will be brought into account and be included in Inheritance Tax calculations.
An estate left to a husband, wife or civil partner will be exempt from IHT.
There are a number of other tax-free allowances which may be available, allowing you to pass on a greater share of your estate to loved ones upon your death. This includes the Residence Nil Rate Band’ (RNRB), introduced in 2017, which applies to individuals passing on their main residence to direct descendants (including their child(ren) or grandchild(ren)) upon their death.
Individuals and their families may also be impacted by Capital Gains Tax (CGT), a tax you pay on the profit made when selling (or ‘disposing of’) something (an ‘asset’) that has increased in value during your ownership (e.g. a second property). The Capital Gains Tax (CGT) allowance was reduced as of April 2023 from £12,300 to £6,000 and is further reduced this financial year to £3,000.
Our Wills, Probate, Tax & Trusts team can provide expert advice on Wills and estate planning, including in relation to trusts and lifetime tax planning.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
