Inheritance tax receipts in the UK have hit a record £7.5 billion. Rising property values, frozen tax thresholds and with large estates being passed on, inheritance tax (IHT) is becoming a burden for everyone. High tax amounts are not just affecting the super-rich who are getting caught in the tax net, it is affecting families of all kinds.
As the IHT systems and thresholds are constantly evolving, new ways to manage and reduce liability are the need of the hour. In this article, we’ll walk you through why IHT is climbing, what it means for your family’s wealth, and how you can plan strategically to keep more of your money in the family with your loved ones.
Why Are Inheritance Tax Receipts So High?
First, we need to understand why the IHT receipts are on the rise. Multiple factors affect the tax system. Let’s analyse them:
Rising Asset Values
This is the most obvious reason for this rise: assets are getting more expensive. Property prices alone put a strain on the millennial and Gen Z generations who will be inheriting these homes. For instance, if you bought a home for £500,000 five years ago, it might not have been subject to IHT. But now? With house prices shooting up, that same property might push your estate into IHT territory. Property values going up may seem like a good thing, but with tax-free thresholds staying the same, it puts a tax strain in the long run.
Frozen Thresholds
The IHT thresholds haven’t changed since 2009. The standard nil-rate band has remained at £325,000 and an additional transferable residence nil-rate band of £175,000 for your main home. With these thresholds frozen, more families are falling into the IHT net, even if their estate value hasn’t risen. It’s a bit like your paycheck staying the same while inflation makes everything cost more.
Demographic Shifts
The UK has an aging population, which means more estates are passing down wealth. In fact, as life expectancy increases, more and more people are reaching the age where they’re passing things on to the next generation. With bigger estates and more people passing them down, IHT receipts just keep climbing.
How IHT Affects Families
First, let’s understand how IHT actually works. Let’s say your family estate is worth £2 million. You have £325,000 nil-rate band and the £175,000 residence band, so after applying those, the taxable portion is £1.5 million. With the current IHT rate at 40%, the tax bill will be at £600,000. And that’s just the start. Council taxes, upkeep costs all add up to this. Families often have to sell off assets, sometimes even their homes, to cover these bills.
But IHT isn’t just a financial issue. It can be really emotional for families. The grief of losing a loved one is hard enough. Adding the stress of having to sell off a family home or other precious assets to cover tax liabilities can lead to all kinds of family tension. The good news is that with a little forward-thinking and planning, this can be avoided.
Myth vs. Fact – Common Misconceptions About IHT
Myth #1: IHT only affects the rich.
Fact: Rising property prices and frozen thresholds mean that more than just the super-wealthy are affected by IHT. A lot more families are getting caught in this net than people realise.
Myth #2: I can gift everything away and avoid IHT.
Fact: Many people assume if you give assets away as a gift you can avoid IHT. But if you give them as gifts and then die within seven years, they could still be taxed. And there are annual gifting limits especially for cash gifts that you need to keep track of. It’s not a free pass to give away everything and avoid tax.
Myth #3: The government will let you off with IHT if you donate to charity.
Fact: While charity donations can reduce your IHT bill, they must meet specific criteria to qualify. If you donate at least 10% of your estate to charity, your IHT rate could drop to 36% instead of 40%.
How to Reduce IHT Liability
There are multiple ways a financial planner can reduce your liability. Chartered financial planners at Partridge Muir & Warren stress the importance of acting early. They point to three common strategies: trusts, gifting, and charitable giving – that can help families reduce IHT and protect wealth across generations.
Use of Trusts
A smart way to reduce your IHT bill is by using trusts. By putting your assets in a trust, you can take them out of your estate. This perfectly legal loophole means you won’t get taxed when you pass away. There are different types of trusts you can look into, like discretionary trusts or interest-in-possession trusts, which allow you to control how and when beneficiaries receive assets.
Gifting Strategies
Another simple way to reduce IHT is by giving gifts. You can gift up to £3,000 a year without triggering IHT. Plus, anything you give away more than seven years before your death won’t count towards your estate. Starting early with regular gifts can really reduce your taxable estate over time.
Charitable Giving
Donating to charity can reduce your IHT. If you leave 10% of your estate to charity, the IHT rate drops from 40% to 36%. That way you are not only helping a good cause, but you’re also reducing your estate’s tax burden.
Conclusion
With IHT receipts at a record £7.5 billion, it’s clear that more families are feeling the pinch. By planning ahead, whether that’s through trusts, gifting, or charitable giving, you can reduce your IHT liability and keep more wealth in your family.
If you’re looking for expert help to structure your estate and minimise IHT, consult a professional. Tailored strategies can help you pass on your wealth efficiently and keep more of it for the next generation.
