HMRC raised £7.1 billion from inheritance figures from April 2022 to February 2023, according to figures released this morning. This is £1 billion more than in the same period a year earlier, continuing the recent upward trend.
Years of house price increases, especially in the South East, soaring inflation, and tax freezes have pushed an increasing number of families that would not consider themselves to be wealthy above the threshold for inheritance tax. However, over recent weeks a number of ministers have suggested that an increase in the threshold – currently £325,000, or a cut in the rate of tax is on the cards in a bid to win votes at the next general election.
The latest forecasts by the Office for Budget Responsibility released last week[1] show that IHT receipts could reach £7.2 billion this tax year, which is 0.7% of all receipts and also 0.3% of national income.
Alex Davies, CEO and Founder of Wealth Club said: “The revenue generated from inheritance tax plays an important part in the government’s spending programme and so it will be interesting to see if Rishi Sunak will opt to change this in a bid to win popularity in the upcoming polls. With a deficit of £125 billion[2] which is equivalent to £1,870 per head of the UK’s population, it could be an expensive tactic.
No one likes to pay more tax than they need to, but the good news is that with a little bit of planning, there are a number of perfectly legitimate ways to reduce your liability. One of the great IHT threats arguably comes from where you least expect it: your ISA. Whilst tax efficient in so many other ways, ISAs form part of a person’s taxable estate along with other savings, investments and possessions, so up to 40% of could be eaten up by inheritance tax rather than passed to your loved ones.
An alternative option is to invest in certain AIM shares within your ISA. Many AIM shares qualify for something called Business Property Relief. Providing you hold them on death and have been invested for at least two years they should be free of inheritance tax. You can choose the investments yourself or opt for the hassle-free approach of a professionally managed portfolio.”
- Give money away. Gifts taken out of regular income, which are not deemed to affect the giver’s standard of living, are inheritance tax free on day one – as are certain smaller gifts. You can give unlimited amounts away but typically these take seven years to be completely inheritance tax free. Of course, once you give away the money you have lost control. If you need it back for an emergency, that’s not an option.
- Invest in companies that qualify for Business Property Relief. These are typically inheritance tax free after two years. Investing in smaller businesses can be risky, however, unlike giving the money away, you retain control.
- Invest in an AIM ISA. ISAs are not inheritance tax free. When you pass away, your loved ones could miss out on 40% of your hard-earned cash. AIM ISAs are a popular way around this. They are riskier but after two years they could be IHT free.
- Its widely known that putting assets into trusts can help you to give away an asset to loved ones, potentially free of inheritance tax while also enabling you to keep an element of control over decisions.
- And finally, whatever you do, make sure you make a will. If you don’t, the law will decide how your estate is distributed and it certainly won’t be the most tax efficient way.
