Of all the ways to look after your family and safeguard their future, inheritance tax planning may feel like your most far-off concern. Naturally, you’ll want to ensure they’re provided for after you’re gone and protect them from a surprising tax bill, but perhaps, you haven’t yet taken any material steps to do so. Overlooking this important detail could leave a much larger impact than you realise.
Inheritance tax (IHT) receipts hit an all-time high of £7.1 billion in the 2022/23 tax year and are on course to continue rising. Government figures show that £2 billion was paid in the first three months of this tax year, with June 2023 seeing the highest amount of IHT paid in a month. The government estimates it will raise £45 billion in IHT between 2022 and 2028.
Investec Wealth & Investment research shows that too many people affected are still not planning ahead. For the benefit of your loved ones, it’s important to be aware of the following considerations.
Inheritance tax typically impacts estates of over £500,000
There are various inheritance tax allowances that allow you pass on a portion of your wealth tax-free. The basic IHT threshold for an individual is £325,000. There is also the residence nil-rate band of £175,000, which is an additional allowance available if you pass on a main residence (i.e. the home you live in) to your children or grandchildren. That means that most people can leave up to £500,000 of their estate tax-free. If their estate exceeds that amount, the excess is liable to be taxed, usually at 40%.
However, inheritance tax rules are complex and the tax-free amount you’re able to pass on depends on various factors including who you leave your property to and the overall value of your estate.
Each year, more estates breach the threshold
In part, IHT receipts are increasing because people are becoming wealthier and leaving behind larger estates. The record highs we’re seeing this year are also due to the recent rise in interest rates, which is forcing some estates to settle their bills more quickly to avoid higher penalties, as interest is charged on money owed.
However, HMRC figures highlight that the increase in IHT receipts is also partly due to the government’s decision to freeze IHT thresholds at their 2020/21 level until at least 2025/26 (rather than increasing the threshold in line with inflation). That is estimated to affect around 161,900 estates over the period as more people are brought into the IHT net.
Data shows that if the basic IHT threshold had followed inflation trends each year since 2009, it would have reached over £478,000 instead of the current £375,000 – a difference of £153,000. This effectively means that some grieving families pay an additional £61,231 (40% of £153,000) to HMRC because of the freeze.
Amanda Cook, Financial Planning Director at Investec Wealth & Investment, says: “Freezing tax thresholds is effectively tax by stealth because it increases the amount that HMRC receives each year without people realising it.”
Many people affected have made no preparations
Our research shows that planning for IHT is not as extensive as it should be. Nearly half (44%) of people with wealth and assets of £1 million or more (after any debts) have not taken advice on IHT planning. More than two out of five (42%) have not taken any steps to reduce potential inheritance tax bills.
It’s the people who are only just being caught in the IHT net who are most at risk, i.e. those with between £1 million and £1.25 million. Our study shows that around 50% of individuals in this bracket have not taken any action to reduce their potential IHT liability and 61% have not taken advice. Meanwhile, every respondent with £3 million or more told us they have taken inheritance tax advice.
Amanda comments: “Discussing inheritance tax planning can understandably be uncomfortable for individuals and their families, but it is worrying to see so many relatively wealthy individuals choosing not to plan. Careful estate planning is in everyone’s best interests. It allows for a much smoother and less stressful transition of your family wealth to children, grandchildren, and other dependents.”
How we can help
At Investec Wealth & Investment, we work closely with our clients to discuss their wishes regarding providing for loved ones in the future and putting plans in place to help ensure that these wishes can be fulfilled. Our relationship-based approach to financial planning and investment management aims to make a tangible and meaningful difference to clients and their families.
There are various ways that we can help you with inheritance tax planning, including understanding your allowances and the rules around inheritance tax gifts. We’re commonly asked questions such as “how is inheritance tax calculated?” and “how much money can you gift?” and can provide answers that are specific to your circumstances.
If you’d like to start a conversation about estate planning, inheritance tax planning, or any area of your finances, get in touch with your local Investec Wealth & Investment office for a complimentary, no-obligation conversation.
Please get in touch if you’d like to speak to one of our financial planners today.
Tax treatment is dependent on individual circumstances. This information is provided in good faith and is based upon our understanding of current tax law and HMRC practice, which may be subject to change in the future.
This article does not offer advice and the content and information about potential investments and services are designed for general use, and so cannot be considered personal to your circumstances or your financial position. It is important to obtain professional advice from an accountant or tax specialist before taking any action or making any decisions.