Stevie Heafford, Tax Partner at HW Fisher, shares their thoughts on the IHT receipts collected by HMRC in December.
“December was certainly a merry month for HMRC as it collected more than £500 million in Inheritance Tax receipts. This brings the total collected from April 2023 to December 2023 to £5.7 billion, which is £0.4 billion higher than the same period last year. The freezing of the nil rate band until 2028 is a major reason why many are now finding themselves caught in the Inheritance Tax trap, and with late payment interest from HMRC hitting 7.75%, it has become even more expensive to make a mistake or pay any tax that you might owe late. With many looking to the Chancellor to scrap the UK’s most unpopular tax in March, we should remember that even the decision to unfreeze the nil rate band and increase it in line with inflation would help many to escape the net of Inheritance Tax.”
Stevie has also taken the time to answer 10 of the most commonly asked questions about Inheritance Tax.
1. When do I need to start Inheritance Tax planning?
As early as possible as your circumstances and exposure to IHT will change over time. Early on, an insurance policy might be all that is necessary but more complex planning will be appropriate as wealth increases.
2. Can I afford to make lifetime gifts?
A good tool is a professional cash flow forecast which is updated regularly. You can plan in major life events (such as marriage, holidays, care fees) and see what your overall position is.
3. Is IHT planning only for the wealthy?
No – many people have been pushed into the IHT net due to increases in property values.
4. What is the current Nil Rate Band?
The current nil rate band is £325,000 per person. This can be used against both lifetime transfers and transfers on death. It effectively “refreshes” every 7 years. Any unused nil rate band as at the date of death can be transferred to a surviving spouse for use on their death.
5. What is the Residence Nil Rate Band?
This is a further nil rate band of up to £175,000 which is available if the residential property is passed to lineal descendants. 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 £2 million.
6. 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 – this can be rolled forward up to 1 tax year. In addition to this, 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.
7. Is it tax efficient to make gifts to charity?
Yes – gifts to charity are tax exempt and if you leave at least 10% of your net estate to charity, the rate of IHT is reduced to 36%.
8. I have a business. Will that be exempt?
Business Property Relief of up to 100% is available for businesses and shares in certain companies, as well as some assets that are held personally, but used by the business/company. However, it is easy to taint this if investment assets or excess cash are held within a trading business.
9. Can I leave my estate to my spouse tax free?
Yes, if the estate is left to a surviving spouse, this is tax free. The surviving spouse will also inherit any unused Nil Rate Band and Residence Nil Rate Band. Bear in mind that this will increase the spouse’s estate for IHT so may only be delaying the problem.
10. Can I pass on my pension tax free?
Yes, you can pass on a pension pot tax IHT free. It is therefore better to draw down on cash assets (bank accounts, ISAs etc) in priority to the pension as those assets will be subject to IHT on death.
