Inheritance Tax collections in the UK Rise to £7.5 billion amid ongoing tax reform debates

Inheritance Tax (IHT) receipts in reached approximately 7.5 billion British pounds in 2023/24, marking a rise from 7.09 billion pounds in the previous financial year.

This demonstrates an increase in collections from this tax, which has been a contentious topic in discussions around tax reforms.

IHT remains a significant aspect of estate planning, levied at 40 per cent on the estates of deceased individuals.

This tax must be paid during the probate process before any assets can be distributed to beneficiaries.

There are several strategies to overcome the challenges of IHT. For instance, not all estates are required to pay IHT; there are exemptions and thresholds that may apply.

Who is liable for IHT?

IHT applies to estates valued over the £325,000 tax-free threshold. This threshold can be increased with the use of the Residence Nil-rate Band (RNRB), potentially raising the tax-free allowance to £500,000 when including a main residence.

Transferring an entire estate to a spouse exempts it from IHT, and allows the spouse to inherit any unused tax allowances.

This combined approach can potentially shield up to £1 million from IHT within a family.

When an estate is valued at £1.1 million, for example, the 40 per cent tax would only apply to £100,000 over the £1 million threshold that is exempt.

Strategies to reduce IHT liability

One common method to reduce IHT liability is gifting, which must occur at least seven years prior to death to fall outside of IHT calculations.

Gifts can include money, property, or other valuables such as jewellery, with the first £3,000 gifted in a tax year being exempt from IHT.

Gifts between spouses are not subject to IHT, regardless of their value. Trusts are another avenue often recommended to manage and potentially reduce IHT liabilities, although setting up and managing trusts can be complex and typically requires professional advice.

Including a charity in your Will can also reduce the IHT rate. Leaving over 10 per cent of your estate to charity reduces the IHT rate from 40 per cent to 36 per cent, providing both a tax benefit and a philanthropic impact.

The future of IHT

Despite ongoing debates and public opinions, significant changes to IHT were not announced recently, and it appears that IHT will not be abolished imminently.

With the current political landscape, including views from leaders such as Sir Keir Starmer who opposes changes to IHT, it is advisable to plan estates considering IHT will continue.

Proper estate planning and writing a Will are essential to ensure that your beneficiaries can manage potential IHT liabilities effectively when you pass away.

For expert advice and guidance on managing IHT challenges, please contact us today.