Inheritance Tax (IHT)


Did you know that the average Inheritance Tax (IHT) bill now stands at £200k?*

HMRC published late last year this statistic, showing that the average IHT bill now runs to a whopping £200k.
(Thankfully though, Scotland bucks the trend, coming in at just over £195k)

It also announced back in July 2021 that they had received a record amount of IHT payments over the last twelve months…£5.67bn
Its highest total yet since 2009-2010.

However, less than 4% of UK deaths resulted in an IHT bill in 2018-19.
The IHT tax bands have remained unchanged and frozen since 2009.
During the last Budget, the Chancellor decided to keep them as they were up until 2026 to help offset the cost of the Coronavirus bill.
But with property prices and investment markets ever increasing, could more of us expect to pay a substantial inheritance tax bill?

So how best to keep that bill as low as possible for your loved ones, who will probably have enough to deal with? Hopefully this article (which is a follow-up to our recent Slideshare) will help…


inheritance advice

Writing a will is a good idea

Make a will

No-brainer, isn’t it? Whilst you’re still compos mentis (of sound mind) write down everything of value that you wish to leave to your loved ones, to avoid arguments and ensure that everyone gets a fair share.
But you’d be surprised just how few of us actually have a will. It is estimated that over half of adults don’t(**) and how many of us put off writing one – stated to be some 30 million eligible adults who avoid sorting it.

The UK laws on intestacy (a fancy legal term for ‘what happens when you die leaving no will’) could mean that although you think your family will be okay, it might mean your intended wishes are not carried out.

What does this mean?

You may have family members that require a guardian to help them make financial decisions. Especially true if your partner needs long-term care and you haven’t specified who this is.
If you’ve built up a business or share a business with another person(s), what happens to the running of said business after you’ve gone?
No named executor means your best interests are guesswork, which could lead to your family incurring additional legal costs as they try to sort out your estate.

Better to give than receive?

Didn’t get the present you wanted as a child?
Did your parents tell you ‘it’s better to give then receive’?
Adults however would do well to make note of gifts or exemptions they can utilise, which can include:

Gifts to spouse/partner

Anything left to a spouse or civil partner is exempt from IHT.

Annual exemptions

Remember to gift as you can in each tax year. The current annual exemption allowance is £3k each year but if you haven’t used last year’s exemption, it rises to £6k.

Wedding gifts exemption

Remember that tax relief varies depending on the relationship between the donor and the receiving party. For example, parents can gift £5k, grandparents £2.5k and anyone else can give £1k.

Gifts to charities and political parties

As these are tax-exempt, you can gift as much as you would like. If you pass on 10% of your net estate to charity, the overall IHT bill on your estate drops from 40% to 36%.

Small gifts exemption

Anything up to £250 is defined as a “small gift” and you can give as many as you like, provided the gifts don’t form part of a larger gift or you use another exemption on the same person.

ISA Allowance

One exemption to note is the ISA allowance – if you state that an ISA is to be given to a surviving partner or spouse, it will not be taxed.
However, if given to any other beneficiary, it is highly likely to be taxed.

Consider a trust

If you have any pensions or life insurance policies, you should consider putting them into trust so that payouts from these should not form part of your estate meaning the money will go direct to those named in the trust.

Provided your contributions to a pension pot or policy do not affect your standard of living and are from your own funds, this is considered to be a ‘normal expenditure out of income‘ exemption.

Business Relief

Another way for business owners to lower their IHT bill is to look into claiming Business Relief.
Provided you own a current and trading business for more than two years, you are able to claim between 50-100% relief on certain business assets.
However, as there are many factors and options to consider, it may be best to consider getting advice on this.

Lastly, should you just spend as much as you can?

The last point to remember is that you can’t take your money with you (although technically you could. Provided it’s not a cremation you want as that would be a waste) and it is your money. You’ve worked hard to earn it. Maybe you don’t want your family to get a 40% tax bill. Or maybe you feel you’ve given them enough and don’t want them to waste it. So don’t forget that you can spend it.

And any good financial planner should help you to keep a record of any gift/receipts/paperwork for your next of kin.
This could help them prove how much was given away but it also comes with the added benefit of ensuring less stress of them.

inheritance tax

Benjamin wasn’t wrong…!


(*) FT Adviser
(**) Co-Op Legal Services