Inheritance Tax – is your estate going to be liable?

Many of us may not believe that our families would be likely to be liable to pay inheritance tax (IHT) when we die, but a new report highlights that more of us will have to pay the tax before the residue can be passed on to our families¹.

HM Revenue & Customs (HMRC) reported a 24% increase in the number of estates paying IHT in the 2022-23 tax year. That is nearly double what it was in the 2018-19 tax year. Currently, your estate pays nothing on the first £325,000 when you die. This sounds a lot but when you consider that the average price of a house is now £310,000 in England according to HM Land Registry², it is not such a stretch to see how homeowners especially might be caught in the IHT trap.

To recognise the rises in property prices, in April 2017, an additional allowance was introduced to help reduce inheritance tax liability, named ‘The Residence Nil Rate Band’³.  To help understand what this could mean, we’ve put together a very simplified case study example to illustrate how it can work.

A married couple or civil partnership could already leave an estate valued at a maximum of £650,000 (£325K each) before incurring Inheritance Tax, but with the introduction of the ‘Residence Nil Rate Band’ this allows them to add a further allowance of £350,000 (£175,000 each per person) on top of this amount. Altogether, potentially £1 million could be left to their heirs without incurring Inheritance Tax.

This is just a simplified case study, and it assumes that there are no other gifts made to their children, etc, but it goes to show the kind of amounts that can be left to heirs before incurring Inheritance Tax can be surprising.

Because of the amount of complexity in this area, we would always recommend that you seek professional advice from a qualified Independent Financial Adviser before making any decisions in this area to ensure that your estate is kept intact and that your family is catered for as per your wishes.

The main reason for bringing this to your attention is that IHT was originally designed as a tax that only the wealthy would pay, however, successive Chancellors have frozen allowances at their current levels since 2019. The current freeze will be reviewed in 2028, by which time more and more families will find that the estates of loved ones are likely to fall into the IHT trap.

Don’t be caught out!

Sources

1. International Adviser (2023) 24% Rise in Number of Inheritance Tax Payers. Available at: https://international-adviser.com/24-rise-in-number-of-inheritance-tax-payers/ (Accessed 22^nd May 2023)
2. Office for National Statistics (2023) UK House Price Index: January 2023. Available at: https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/january2023 (Accessed 22nd May 2023)
3. Gov.uk (2023) Work out and apply the Nil Rate Band for Inheritance Tax. Available at: https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band (Accessed 22nd May 2023)

All the information in this article is correct as of the publish date 25^th May 2023. The opinions expressed in this publication are those of the authors. The information provided in this article, including text, graphics and images does not, and is not intended to, substitute advice; instead, all information, content and materials available in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information.