Inheritance Tax Surge: What UK Estates Need to Know and How to Mitigate Costs
The recent report from HM Revenue and Customs (HMRC) reveals a concerning trend for UK estates facing Inheritance Tax (IHT). Following the release of annual IHT receipts for the 2022/23 tax year, there has been a significant rise in the number of estates liable for this tax. In this article, we will explore the details of this increase, its implications, and strategies for mitigating IHT obligations.
Rising Numbers of Estates Paying Inheritance Tax
According to the latest figures, the number of estates assessed for IHT has surged by 13%, reaching 31,500 compared to the previous year. This marked increase is largely attributed to the freezing of inheritance tax allowances, an action that wealth managers believe the government has employed to extract more tax revenue from middle and upper-middle-income families.
The Current State of Inheritance Tax Allowances
The existing IHT allowance has been set at £325,000 (approximately $429,000) for 16 years and will remain unchanged until 2030. Additionally, the £175,000 residence nil rate band, designed to provide families with relief when passing on property, has not seen any revisions since 2020.
Nicholas Hyett, an investment manager at Wealth Club, notes that the impact of this freeze has led to 1% of estates carrying 65% of the total IHT burden, with those valued over £10 million facing an average bill of £3.6 million.
Predictions and Future Outlook
Wealth management firm Rathbones anticipates that, by the end of the 2025/26 tax year, 3,524 estates will incur IHT bills exceeding £500,000. This projection considers an annual increase rate of 8.74%, but with the impending inclusion of pensions in IHT calculations from April 2027, the actual numbers may be even higher.
An Increase Driven by Pension Changes
Experts like Claire Trott from St James’s Place forewarn that IHT liabilities will escalate significantly due to upcoming changes. Current estimates suggest that the number of estates affected could jump from 31,500 to 49,000 or more, largely because of pension inclusions, reflecting an astonishing 55% rise in just five years.
Strategies for Mitigating Inheritance Tax
As families brace for increasing IHT obligations, proactive planning becomes essential. Here are effective strategies to handle IHT exposure:
1. Smart Gifting
One of the most straightforward methods for reducing IHT is gifting assets or money. Individuals can give away up to £3,000 annually tax-free and make unlimited gifts to spouses or civil partners. Regular gifts from income can also help decrease estate size over time. However, keep in mind that gifts made within seven years of death may still attract tax.
2. Utilize Trusts
Establishing a trust can effectively move assets out of an estate and reduce IHT calculations. Trusts offer flexibility in determining who benefits and how, but they can be complex. It’s advisable to seek professional guidance before proceeding.
3. Protect Partners
Married couples and civil partners can transfer their entire estate to one another without any IHT. However, long-term partners not in a formal relationship do not benefit from this. Registering a civil partnership can be a financially savvy decision.
4. Maintain a Current Will
Creating and updating a will empowers individuals to control asset distribution and manage potential tax liabilities. An up-to-date will can help maximize exemptions, ensuring wealth is passed on as intended.
5. Invest in Unlisted Companies
Investing in unlisted companies that qualify for Business Property Relief can lead to IHT exemption after just two years. While taking on such investments carries risks, they allow individuals to maintain control over their assets. From 2026, there will be a £1 million Business Relief Allowance, post which additional amounts will be taxed at a reduced rate.
6. Consider AIM ISAs
While traditional ISAs are not exempt from IHT, AIM ISAs present a riskier but potentially rewarding option. These shares may escape IHT after two years, with a reduction to 20% tax from 2026.
Conclusion
As the landscape of Inheritance Tax evolves, proactive measures are crucial for families looking to protect their wealth. With increasing rates and new regulations on the horizon, seeking ongoing, regulated advice is more important than ever to navigate the complexities of IHT and ensure that future generations benefit from wisely managed estates.
By adopting strategic approaches, individuals can mitigate potential tax liabilities and secure their family’s financial future. Ensuring proper planning today can lead to significant savings tomorrow.
