‘Largest’ inheritance tax exemption as families liable to pay levy increases (Image: GETTY)
Britons are urged to check if they can make the most of certain reliefs as those dragged into the inheritance tax net are growing by the year.
Earlier this month, HMRC confirmed that total inheritance tax receipts hit a record £2.1billion for the opening quarter of the 202425 tax year.
Further figures published this week show that the number of estates paying inheritance tax (IHT) is climbing, with the proportion now standing at just under 4.4 percent.
However, experts at AJ Bell note that the impact of reliefs and allowances can be seen in the effective tax rates paid by estates with an IHT liability.
Charlene Young, pensions and savings expert at AJ Bell said: “Although IHT is payable at 40 percent, the average effective rate for estates in 2021/22 was 13 percent, thanks to the combination of tax-free allowances, exemptions, and reliefs used.”
What is Inheritance Tax?
Inheritance Tax is a tax on the estate (property, money and possessions) of someone who’s died.
There’s usually no Inheritance Tax to pay if either:
• The value of your estate is below the £325,000 threshold you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club
• The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the threshold.
For example:
Your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).
Who pays Inheritance Tax?
• Funds from an estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC). This is done by the person dealing with the estate (called the ‘executor’, if there’s a will)
• Beneficiaries generally don’t pay tax on things they inherit. They may have related taxes to pay, for example, if they get rental income from a house left to them in a will.
But one tax relief saved families the most money: spousal transfers, which accounted for 68 percent of the value of all exemptions and reliefs.
Everyone can pass on up to £325,000 before any IHT is due, although this IHT nil rate band has been frozen since 2009.
The residence nil rate band (RNRB) has been available since 2017 and gives a boost of up to £350,000 per couple if they leave a property to their descendant(s).
If one marital or civil partner passes away first, any unused percentage of their nil-rate bands are added onto the surviving partner’s band. This means married couples can pass on as much as £1million to loved ones tax-free.
Ms Young said: “Aside from the universal nil rate band, and the potential to use the additional residence option to increase it, investors can make plans in their lifetimes to benefit from reliefs and exemptions when they die and pass on wealth.
“The largest exemption continues to be for transfers between spouses and civil partners. These were worth over £15billion in 2021/22, or 68 percent of the value of all reliefs against assets in estates over IHT thresholds.”
Additionally, Ms Young noted: “Any gifts you make to your spouse or civil partner in your lifetime or on your death are exempt from IHT, assuming they are also UK-domiciled.
“Crucially though, this exemption doesn’t apply to gifts between unmarried partners, even if you have lived together for many years.”
There are a number of other reliefs people can use to reduce inheritance tax liability, such as annual gifts and gifts from income.
Ms Young explained: “Anyone can gift up to £3,000 a year, either to one person or split between multiple people, without it being considered for inheritance tax purposes.
“You can also give unlimited gifts of up to £250 per person, if you haven’t used another allowance to make them a gift.”
People can also gift extra amounts to someone getting married or entering a civil partnership.
Ms Young said: “These are up to £5,000 for a child, £2,500 to a grandchild or great-grandchild or £1,000 to anyone else.
“The effect of gifting is to remove money from your estate, meaning that you have less taxable assets on death.”
Additionally, people can make regular gifts from their income tax-free, provided they don’t reduce the person’s standard of living.
Ms Young noted: “Do make sure you keep good records of you regular income and these outgoings as whoever is taking care of your estate admin will need to declare them as part of any IHT return.
“If you want to make substantial gifts over these limits and allowances then you need to be aware of the seven-year rule. If you die within seven years of giving these gifts, IHT is due on a sliding scale known as taper relief.”
Ms Young added: “Trusts can be an effective way of Estate Planning, but the tax rules are complex. You should consider professional legal and financial advice if this is something you’re considering.”
