Graham Southorn shares inheritance tax tips
Inheritance tax (IHT) receipts increased by a massive £400million between April and September this year compared to the same period last year.
It came after analysts pinned a £1billion increase in March this year to a stark increase to a combination of tax-free thresholds frozen since 2009, soaring house price growth and general inflationary pressures, and with interest rates on overdue IHT having increased in April, it’s becoming a more “expensive tax to get wrong”.
Stevie Heafford, tax partner at the accountancy firm HW Fisher said: “Last year the Chancellor decided to freeze the inheritance tax nil rate band until 2028. As a result, more people are going to find themselves caught in the inheritance tax trap.”
Fortunately, Ms Heafford added that “significant” pension changes announced during the Spring Statement could spell better news as there may be an “opportunity” for people to leave behind more to their loved ones.
In light of a number of recent changes, HW Fisher answered eight of the most commonly asked questions when it comes to IHT.
Inheritance tax: Recent pension changes spell a better “opportunity” to leave more for loved ones
How much inheritance tax do you have to pay?
Inheritance tax is charged on a person’s estate if the total value of assets exceeds £325,000. This is the current tax-free threshold for the 2023-24 financial year. The Standard Inheritance Tax rate is 40 percent and is only charged on the part of the estate that exceeds the threshold.
Ms Heafford said: “This can be used against both lifetime transfers and transfers on death. It effectively ‘refreshes’ every seven years. Any unused nil rate band as of the date of death can be transferred to a surviving spouse for use on their death.”
What is the Residence Nil Rate Band?
This is a further nil rate band of up to £175,000 which is applied if a residential property is passed on to direct descendants.
Ms Heafford said: “It is only available against the death estate, but any unused relief can be passed to a surviving spouse. The relief is tapered for estates in excess of £2million.”
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The standard inheritance tax rate of 40 percent is applied to assets that exceed £325,000
Can I make lifetime gifts free of IHT?
Yes, the Nil Rate Band can be set against lifetime gifts as well as on death. There is also an annual exemption of £3,000, which can be rolled forward up to one tax year.
In addition to this, Ms Heafford said: “Small gifts of up to £250 and gifts out of excess income can be made to anyone free of IHT. You can also make gifts of between £1,000 and £5,000, depending on the relationship to the giftee, in consideration of marriage or civil partnership.”
Is it tax efficient to make gifts to charity?
Gifts to charity are tax-exempt and according to HW Fisher, those who leave at least 10 percent of their net estate to charity will see their IHT rate reduce to 36 percent.
Legacy donations are incredibly important to charities as according to Free Wills Month, most UK charities depend on legacies for up to half of their income.
From pensions to gift rules – your top 8 inheritance tax questions answered
I have a business. Will that be exempt from IHT?
According to HW Fisher, Business Property Relief of up to 100 percent is available for businesses and shares in certain companies, as well as some assets that are held personally, but used by the business or company.
However, Ms Heafford said: “It’s easy to taint this if investment assets or excess cash are held within a trading business. For agricultural assets, similar relief is available.
“In the Spring Statement, the Chancellor announced that the Government is organising a consultation to explore the taxation of ecosystem service markets, and the potential expansion of agricultural property relief from inheritance tax to cover certain types of environmental land management. It will also restrict the geographical scope of agricultural property relief and woodlands relief from inheritance tax to property in the UK from April 6, 2024.”
Can I leave my estate to my spouse tax-free?
If an estate is left to a surviving spouse, this is tax-free. Ms Heafford said the surviving spouse will also inherit any unused Nil Rate Band and Residence Nil Rate Band.
However, she noted: “Bear in mind that this will increase the spouse’s estate for IHT so may only be delaying the problem.”
Can I pass on my pension tax-free?
People can pass on a pension pot IHT-free, which makes it “better” to draw down on cash assets, such as bank accounts and ISAs, “in priority” to the pension as those assets will be subject to IHT on death.
During the Spring Statement, the Chancellor abolished the Lifetime Pensions Allowance and the annual cap on tax-free pensions contributions was increased to £60,000 a year.
Ms Heafford said: “These changes have made pensions potentially even more valuable for IHT planning as you can pay more into your pension, and still have access to your funds should something unexpected happen. As always, the devil is in the detail so do seek advice in this regard and bear in mind the rules could change in the future.”
Ms Heafford added: “From April, the rate of interest on overdue IHT increased from 6.5 percent to 6.75 percent – making it even more expensive to get this tax wrong. Once you have worked out what you can afford to give away, we’d recommend seeking professional advice.
“There are a number of possibilities and pitfalls in IHT planning and a professional is trained to evaluate the knock-on effects of other taxes – such as Capital Gains Tax – which might be triggered by IHT planning.”
The advice comes amid hope that Chancellor Jeremy Hunt will unleash a major cut to inheritance tax when he delivers his Autumn Statement.
Mr Hunt will address the House of Commons in Westminster, central London, on November 22 to outline his budget to his parliamentary colleagues and the nation.
The Chancellor has been said to be mulling changes that would allow people to pass on £1million tax-free.
The speculation over the future of “Britain’s most hated tax” came after the Office for Budget Responsibility calculated that the Treasury is around £5.5billion in the black.
The Telegraph reported that Mr Hunt was open to measures that would not simply pump more money into the system during a dogged battle against inflation, including cutting inheritance tax.
Any reforms to inheritance tax could include simplying the system so that people can pass on greater amounts without being taxed.
Or they could include reducing the headline 40 percent rate.
Currently, gifts must meet three criteria in order to qualify for an exemption under the rules that govern passing on any inheritance to loved ones.
First of all, the gift must come from income as opposed to capital. Secondly, the gift must follow a pattern that is regularly, for example a monthly or yarly gift.
Finally, any gifts should not affect one’s everyday standard of living.
But in order to claim any tax breaks, the applicant will need well kept and rigorous records in including receipts of the gift purchases.
Among the details that will be required are the person’s salary, pensions, investments, savings income, mortgages, insurance, household bills, travel costs, holidays and care home fees.
To prove that the gift is in line with rules and regulations, the executor will need to work out “net income minus total expenditure”.
Any gifts must also be part of one’s normal expenditure in order to qualify and if a gift is unusually large but some of it falls within normal expenditure, HMRC may exclude the amount about the normal expenditure from any tax breaks.