Latest official figures reveal Government received over £5 billion in IHT last year
Total IHT receipts have almost doubled since 2010/11
IHT receipts have risen by 10% year-on-year on average since 2009/10, driven by rising asset values and the freezing of the nil-rate band since April 2009
Tips for reducing your IHT bill
Laura Suter, personal finance analyst at AJ Bell, comments:
“Freezing rate bands is an age-old Government trick to stealthily boost receipts as asset values rise and more people are dragged into paying tax.
“When it comes to IHT, this has happened through a freezing of the so-called nil-rate band in 2009/10 at £325,000. It has remained at this level in the 8 years since, meaning more and more estates are being hit with IHT bills on death as the value of their estates – particularly property – have risen post-crisis.
“An additional residence nil-rate band of £100,000 was introduced in 2017/18, rising to £175,000 by April 2020. This means that a couple will be able to pass on an estate worth £1 million without paying any IHT at all.
“IHT is an extremely complicated area and one where getting expert advice is absolutely essential to ensure your assets are sheltered from the taxman.”
Source: HMRC
Tips for reducing your IHT bill
“With more and more people being dragged into paying inheritance tax, people need to be savvy about making the most of the free allowances and tax breaks that the Government hands you. Most are simple to implement and can end up saving hundreds of thousands of pounds per couple in inheritance tax.”
Make use of the new residence nil rate band:
The “residence nil rate band”, otherwise known as the family home allowance, came into effect in April 2017 and gives an additional allowance on top of the usual nil rate band. In the first year it gave an extra £100,000, but this increases by £25,000 every year until 2020. For the current year it is worth £125,000, rising to £150,000 next April, and £175,000 in 2020.
Per couple, this means you can ultimately save £140,000 in inheritance tax by using the new allowance. You only get the new allowance if you’re leaving your home as part of your estate. This property must be a home that you lived in at some time, rather than a buy-to-let property, and you must also leave the home to your direct descendants, which the taxman classifies as your children, grandchildren, step-children, step-grandchildren or adopted children. If you have no children then you can’t make use of the allowance. The allowance is also reduced if your estate is worth more than £2m.
Use all your annual gifting allowances:
Normally, if you make a gift to someone from your estate, inheritance tax will be due on it if you die within seven years, at a reducing rate. But everyone has various amount they can gift to people annually, where this seven-year rule does not apply.
Each person can give away £3,000 every year, and what’s more, if you haven’t used the previous year’s allowance you can carry it forward to this year. You can also gift money for a wedding: £1,000 per person, or £2,500 for a grandchild or great-grandchild, and £5,000 for a child. You can also make regular gifts out of your income that are IHT-free, long as they don’t affect your standard of living. On top of this, you can give as many gifts of up to £250 per person in a year, as long as you haven’t used one of the other exemptions on that person that year.
Use up ISA money before using pensions:
Any money held in your ISA on death is counted as part of your estate for IHT purposes, and so counts towards you £325,000 limit. However, with pension money, the full value can be passed to a beneficiary inheritance tax-free if the pension-holder dies before age 75. If they die after 75, the pension will still be IHT-free but the beneficiary will pay tax on any income taken or up to 45pc if they take a lump sum. It’s therefore more tax efficient to use up your ISA money before you die, before using up your pension pot.
Invest in AIM shares:
You can invest in shares listed on the AIM stock market, and some are eligible for Business Property Relief, which has IHT benefits. This means that as long as you hold the shares directly and for at least two years, they will be exempt from inheritance tax. You must make sure that the AIM shares you invest in are eligible for BPR, as not all are.