Inheritance tax: “perceptions of IHT being a preserve of the wealthy are set to change”

Paul Barham, Partner at Forvis Mazars commented: “The latest figures from HMRC bring to a close another record fiscal year for IHT intake, with £8.2 billion total collected against £7.4 billion for the previous fiscal year (23/24).

“With the IFS predicting that by 2029–30, the share of deaths liable for inheritance tax will reach its highest level in over 50 years,* a combination of frozen thresholds, as well as changes to Business and, controversially, Agricultural Property Relief are putting more pressure on an increasing proportion of families. And to add to the cauldron, pensions are planned to be included within estates from 2027.  Historically this tax has made up a small proportion of the total tax haul, but perceptions of IHT being a preserve of the wealthy are set to change.

“Mitigating the tax is possible, but considered planning is required for this – especially given the rumours of more changes to come, potentially making gifting harder. Making use of allowances while you are able to is essential, as well as knowing the rules around gifting and setting up trusts.”

*https://ifs.org.uk/data-items/share-deaths-subject-inheritance-tax
 

5 Tips for dealing with inheritance tax

The power of gifting

Gifting is an efficient and effective way of passing wealth to loved ones while at the same time reducing the value of your estate for inheritance tax purposes. Lifetime gifts are immediately exempt if they fall within the Annual Allowance (£3,000 pa) or Small Gift (£250 pa) exemptions. If you have a larger disposable income you might want to consider whether you might qualify for the normal expenditure out of income exemption which has no limit. Larger lifetime gifts can also be made but they do come with some rules, mainly a seven-year clock. You make a gift of any amount but if you pass away within seven years of making that gift, then some or all of that gift could be classed as part of your estate for IHT calculations.

Consider Trusts or a Family Investment Company

If you don’t wish to make outright gifts, you can make use of a structure such as a Trust or Family Investment Company. This can have the effect of removing wealth (and future growth) from your estate while still enabling you to have control over the assets, as well as offering an element of asset protection in the event of a failed business or relationship breakdown. There are lots of different types of trust that each come with their own tax rules so it’s best to consult a specialist to ensure you choose the one that best suits your and your beneficiaries’ future needs.

Pensions as IHT tools

Pensions can be a valuable tool when passing down wealth because they sit outside your estate for IHT purposes and as of April 2023, the lifetime allowance has been removed, so there is no limit on how much you can save over your lifetime. If you have assets inside and out of a pension plan, you’ll want to consider when to drawdown from your pension and whether to also consider using non-pension assets to meet the full cost of everyday life.

However, the Chancellor in the Autumn Budget announced pensions may no longer be outside of the scope of IHT from April 2027 and therefore liable for 40% tax. For those who had planned to use their pension to pass on wealth, speaking with an adviser should be top of the priority list.

Make a will

A will is one of the most overlooked financial documents and is perhaps the most essential thing you can do to ensure your estate goes to who you want and that your wishes are carried out. Without a will, your estate will be distributed under the intestacy rules. This can mean that some of your estate could be subject to IHT that could have been avoided with legitimate will planning.

Seek some help

Inheritance planning is notoriously complex. But there are advantages to starting earlier than you think is necessary. Seek the support of an adviser that you trust and one that you think will have your best interests at heart. While no one really wants to think about the need to pass on wealth, it can be of great benefit to your loved ones to get plans in place early