Inheritance tax revenue continues to rise – and what to do about it

HMRC reported record inheritance tax receipts (IHT) over the period April 2021 to March 2022 – a total of £6.1 billion, an increase of nearly 13% on the same period a year earlier.

A continued rise in the number of estates attracting IHT, and the total amount of IHT paid to HMRC each year, is no surprise. Just look at the widening gap between the average UK house price (which rose from just under £156,000 in April 2009 to almost £277,000 in February 2022) and the threshold at which the IHT becomes due (which has remained frozen at £325,000 throughout this same period) to find out why.

Simply put, the average estate value continues to grow, while the IHT-free allowance (known as the zero-rate bracket) hasn’t changed in over a decade. Unsurprisingly, more and more domains are becoming IHT-attributable, a trend that is only likely to continue as the Zero Rate Band and Residence Zero Rate Band (more details below) will remain frozen until further notice. at least April 5, 2026. The responsibility estimates that IHT revenue will grow by a further 36% to £8.3bn by 2026/27 and that more people will be captured by IHT in the years to come.

So what to do?

The most important step individuals can take is to review their assets, consider the structure of their wills, and take timely advice on appropriate planning. Some of the main options and reliefs that we recommend most often include the following:

  • Transferable zero-rate bracket – spouses can “inherit” unused zero-rate allowance from each other – so if everything is left to the survivor on first death, it may be possible to claim a full zero-rate allowance of up to at £650,000.
  • Zero rate residency bracket – this was introduced for deaths on or after 6 April 2017, and at the current rate gives each person an additional IHT free allowance of £175,000, provided certain conditions regarding how their primary residence is inherited are met. This allowance can also be “inherited” between spouses. In particular, this only applies in full if your estate is less than £2 million at death.
  • Workforce Reduction Allowance – this makes it possible to claim the residence allowance at zero rate in certain circumstances when the deceased person has reduced his workforce (reduction in the value of his property) or moved into a nursing home before his death.
  • Business real estate relief – ownership of part of a business enterprise or shares of certain unlisted companies may qualify for 100% IHT relief, but must have been owned for at least two years prior to death.
  • Donate Assets – for those who can afford it, there are various exemptions that apply to capital donations (after which you usually have to survive seven years to not be charged to the IHT). It is important to note that regular donations of excess income can immediately fall outside your estate for IHT, as long as certain conditions are met – and detailed records are kept. The best way to achieve this will depend on individual circumstances.

Even after death, it may be possible to mitigate IHT by entering into a deed of modification (within two years of death), so family members should be aware of this and take early advice during the estate administration process. In many cases, it is possible that estates that far exceed the zero rate bracket will be entirely exempt from IHT, applying the relevant reliefs.

More and more families are being dragged into the IHT net every year as the threshold for paying the tax has not been raised by £325,000 since April 2009. Had that figure kept pace with inflation, the threshold would now sit at £500,000.

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