How to stay on the right side of IHT

Inheritance Tax (IHT) – the British public’s most hated tax – is levied on the value of a deceased person’s estate. From April 2022 to December 2022, the amount raised by IHT was £5.3 billion, £700 million higher than a year previously. As the frozen threshold forces more and more people to pay, what can you do to minimise your risks?

More people now pay IHT

IHT is payable on money, savings or any other assets you pass on when you die. In some cases, it can also include some gifts you make during your lifetime.

HM Revenue & Customs (HMRC) investigated more than 4,000 bereaved families in 2022 over suspicions of underpaid inheritance tax¹. In total, the tax authorities reclaimed £326 million for IHT payment errors in the 2021-22 tax year, a 28% annual rise.

The nil-rate band threshold is £325,000 for a single person (an additional transferable main residence nil-rate band of £175,000 is available when passing the family home down to children or other direct descendants). This figure has been frozen since 2009 and last year’s Autumn Statement revealed that IHT thresholds will not change again until at least April 2028.

HMRC scrutiny

With a greater number of assets now surpassing the tax-free thresholds, more people are being forced to pay. The complex rules and a misunderstanding that only the very wealthiest must pay IHT are leading many to make costly mistakes.

Indeed, 684 more families were investigated in the 2021-22 tax year than the year before – and HMRC has pledged to dedicate more officials to investigating IHT payments in 2023. Above the £325,000 threshold, all assets are taxed at 40%, which means there are vast sums at stake for many.

In its investigations, HMRC can study any available sources of information about your family finances. As well as the most blatant assets like property and savings accounts, the authorities can take into account the value of anything from fine art to diamond rings.

Shiny assets

For example, if you inherit a valuable ring and fail to declare this, there could be significant legal implications. Insurance documents create a paper trail for HMRC investigations.

This means that, if your IHT payments do not match HMRC’s own forecasts, you could quickly end up receiving its questions. IHT investigations are often complex because of exemptions, differences in valuations, trusts and business relief.

Gifting is a popular way to reduce your IHT bill. Every financial year you can make gifts of up £3,000, with any leftover allowance allowed to be carried forward to the next year. Giving away money during your lifetime (‘potentially exempt transfers’) is also potentially thorny: for these gifts not to be counted as part of your estate on your death, you must outlive the gift by 7 years.

Here to help

With more estates likely to be subject to IHT in the years ahead, it’s never been more important to receive expert advice. When planning for succession, the right legal advice at an early stage can help you develop a strategy to minimise your IHT bill and save your beneficiaries significant amounts of money.

Our specialist tax lawyers have vast experience dealing with the ins and outs of IHT so if you are looking for clear, comprehensive advice and guidance, get in touch today.

¹ Figures come from a Freedom of Information request by NFU Mutual

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. The Financial Conduct Authority (FCA) does not regulate Will writing, tax and trust advice and certain forms of estate planning.