Have you thought about Inheritance Tax?

Have you thought about Inheritance Tax?

Inheritance Tax in 2021-22 was £6.1 billion, a £729 million increase from £5.4 billion the year before.

What is Inheritance Tax?

IHT is a tax on the estate (the property, money, and possessions) of someone who’s died above a set of thresholds, known as the nil-rate band and residence nil-rate band.

The tax is paid by the estate but affects the amount beneficiaries could receive.

How may you be affected by Government changes?

Families paid out £326 million more in Inheritance Tax (IHT) last year after HM Revenue & Customs implemented more rigorous checks on underpayments. Investigators raised 28 per cent more in the 2021-2022 tax year than in the year before. HMRC launched 4,258 investigations in 2021/2022 to recover unpaid tax from bereaved families.

The amount paid in IHT is rising as the £325,000 nil-rate band threshold has not increased since 2009.

Similarly, the residence nil-rate band threshold of £175,000 also hasn’t increased.

One in 25 estates is liable for IHT and it is estimated that this figure will rise.

Who is responsible for paying Inheritance Tax?

If there is a Will, the Executor will be responsible for paying IHT. The Beneficiaries of a Will do not pay IHT on what they inherit, but may have to pay taxes on rental income if they inherited a house.

How can you mitigate Inheritance Tax?

IHT can be reduced through a variety of methods.

If you give gifts of up to £3,000, this will be tax-free and under annual exemptions. For example, this may include payments to help with living costs or birthday gifts.

If you give gifts of £3,000 or more, these may be subject to the seven-year rule meaning these gifts will count towards the value of your estate.

If you die within seven years of gifting, then the gift will count towards your nil-rate band meaning it may be subject to IHT.

You will pay less IHT, the longer you live after the gift is made and you could be charged IHT if you give away more in the seven years before your death.

You may also choose to give away gifts to charity which can help mitigate Inheritance Tax. If you choose to give away gifts to charity, equal to 10 per cent or more of your estate, you only pay IHT at a rate of 36 per cent.

Other ways which may allow you to lower your IHT liability include trusts, Business Property Relief, and Agricultural Property Relief.

If you need advice on Inheritance Tax or probate-related matters, contact us today.