Why more people than ever before are paying Inheritance Tax.

March 15, 2023

We all want to make sure the people we care about most are taken care of when we’re gone, and, if we have a financial legacy to leave, it’s important to plan to minimise the amount of Inheritance Tax due on your estate.

As UK Inheritance Tax receipts reach a record £6.1bn, what plans could you put in place to make sure more of your wealth goes to look after your family, not straight into the clutches of the tax man?

What is Inheritance Tax?

Inheritance Tax is a tax on the estate of someone who has passed away. The standard Inheritance Tax rate in the 2022/23 tax year is 40%.

Your estate is essentially everything you own. This includes savings, investments, property, life insurance pay-outs (not written in an appropriate trust) and personal possessions. Your debts and liabilities are then subtracted from the total value of your assets.

Every person in the UK currently has an Inheritance Tax allowance of £325,000 (frozen until April 2026). This is known as the nil-rate band (NRB).

In 2017, an extra allowance was introduced to make it easier to leave your main residence to direct relatives (a child or grandchild, for example) without incurring Inheritance Tax. This allowance is currently £175,000, known as the residence nil-rate band (RNRB), and is in addition to the standard nil-rate band of £325,000.

If the overall value of an estate is more than £2m, a tapered withdrawal applies to the RNRB. The withdrawal rate is £1 for every £2 over the £2 million threshold.

Does Inheritance Tax apply to married couples/couples in a registered civil partnership?

If you are married or in a registered civil partnership, in most cases you can pass on your assets to your partner free from Inheritance Tax. The surviving partner is then allowed to use both tax-free allowances.

As long as the first person to pass away leaves all of their assets to their surviving spouse, the surviving spouse will have an Inheritance Tax allowance of £650,000 (£1 million if they are eligible for the RNRB).

Why are more people paying more Inheritance Tax?

Recent figures from HM Revenue & Customs (HMRC) show that the number of estates in the UK paying Inheritance Tax has increased [1]. In the 2021/2022 tax year, Inheritance Tax receipts totalled £6.1 billion, up £729 million on the previous year.

This 14% increase marks the largest single-year rise in Inheritance Tax receipts since the 2015/2016 tax year.

Why?

The increase stems largely from the ongoing freeze on the nil-rate Inheritance Tax band and residence nil-rate Inheritance Tax band.

This, combined with a rapid rise in house prices, means that many more families are finding the total value of their estate is likely to be above £1million at the point of death, making them subject to Inheritance Tax.

What does this mean for me?

We understand that it’s not always an easy conversation to have, but the current picture makes it all the more important that you have a conversation with your loved ones sooner rather than later, so that you all fully understand your estate, the value of it and the potential for an Inheritance Tax bill.

It is possible to put things in place that can reduce the future Inheritance Tax bill on your estate, or even remove the liability completely, potentially saving your family thousands of pounds, and ensuring that your wealth is there for them when they need it most.

Every situation is unique, and a conversation with a Talis adviser will help you to identify specific issues and develop your long-term wealth protection plans, particularly with a view to Inheritance Tax.

To find out more, get in touch.