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Inheritance Tax is commonly seen as a tax on wealthier individuals however more and more families are now suffering Inheritance Tax when their loved ones pass. From April 2023 to March 2024 HMRC collected £7.5 Billion in Inheritance Tax, which is £400 million higher than the previous year.
In this article Paul Harris considers why this is now the case and some possible options readers may have to mitigate this.
General Principles of Inheritance Tax
The basic principle of Inheritance Tax is that individuals will pay Inheritance Tax at 40% on the amounts in excess of the relative thresholds.
The main threshold everyone gets is the Nil Rate Band. The Nil Rate Band is currently £325,000 which has been the case since 6 April 2009 and this has been frozen to 5 April 2028. If there are no further changes then that’s a staggering 19 years without an increase!
On 6 April 2017 an additional Nil Rate Band was introduced known as the Residence Nil Rate Band. The Residence Nil Rate Band is currently £175,000 which has been the case since 6 April 2020 and this again has been frozen to 5 April 2028. While not as bad as the Nil Rate Band this is still 8 years without an increase.
The Residence Nil Rate Band is generally available to those with a qualifying residential interest in their Estate which is being passed on to a direct descendant. A qualifying residential interest is a property which at some point during the deceased’s lifetime was occupied as their main residence.
If both the Nil Rate Band and Residence Nil Rate Band apply, an individual can have an Estate worth £500,000 before any Inheritance Tax will be due.
There is an exemption against Inheritance Tax for individuals leaving assets to their spouse or civil partner Any unused Nil Rate Bands can be transferred to the surviving spouse as a percentage. In this circumstance an individual could have a maximum Estate of £1 million before exceeding the thresholds and Inheritance Tax being due.
So if your Estate exceeds the thresholds, or is even approaching them, what options are available to you?
Inheritance Tax Planning Options
Gift of assets
The most common way individuals reduce their Estate is by way of making gifts of assets to the next generation. Gifts to individuals are referred to as potentially exempt transfers and are not subject to Inheritance Tax when made.
Many people are aware of the 7 year rule, where if the gift is outlived by 7 years it is free of Inheritance Tax. However, what happens if the gift is not outlived by 7 years?
If the gift is outlived by less than 3 years the asset is retained within the donor’s- estate and full inheritance tax is payable. After the 3 years the asset still remains within the Estate however if any Inheritance Tax is due on the gift then the tax is tapered depending on the number of years since the gift was made.
Advice should be sought when making a gift, especially if the gift is a chargeable asset (for example a rental property) as a capital gain may inadvertently be realised resulting in a further tax liability.
Inheritance Tax Efficient Investments
Some investments achieve relief from Inheritance Tax known as Business Property Relief. There are a variety of assets that qualify however the most common are shares in an unlisted trading company. For the purpose of Business Property Relief shares on the AIM (Alternative Investment Market) are considered unlisted. Provided the shares have been held for more than 2 years relief is given at 100% making them an ideal investment as they result in full relief from Inheritance Tax quicker than making a gift.
Inheritance Tax for Non-Domiciliaries & Non-Residents
At present the non-Domiciled rules still apply, such that ‘non doms’ are only subject to UK Inheritance Tax on their UK Assets. However, in the 2024 Spring Budget it was announced that the existing non dom regime would be scrapped, and from 6 April 2025 UK Inheritance Tax will instead be looked at based on resident status. The final legislation has not yet been confirmed however it is expected that for individuals arriving in the UK once they have been resident for 10 years they will be subject to UK Inheritance Tax on their worldwide assets, similarly once an individual has been non-resident for 10 years they will only be subject to UK Tax on their UK assets.
If you think you may need advice regarding your Estate and the potential Inheritance Tax Liability that may arise, we can work with you to understand your circumstances and objectives and the best way to achieve these in a tax efficient manner. Get in touch by calling 0330 058 6559 or emailing hello@scruttonbland.co.uk.
Inheritance tax – Office for Budget Responsibility (obr.uk)
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