As per HM Revenue & Customs, the total Inheritance Tax (IHT) receipts from April 2023 to September 2023 amounted to £3.9 billion, marking a £400 million increase compared to the corresponding period in the prior year. June 2023 recorded the highest-ever IHT receipts.
Inheritance Tax Explained
Inheritance Tax is typically levied at a rate of 40% on the entire estate of a deceased individual.
The estate’s total value is determined by subtracting any debts and funeral expenses from the deceased’s assets.
In the current Inheritance Tax framework, individuals enjoy a tax-free allowance of £325,000, known as the Nil Rate Band. This means the initial £325,000 of their estate passes without incurring IHT.
Moreover, if the deceased owns and resides in a primary residential property, and intends to bequeath it to direct descendants with an estate valued at no more than £2 million, they may qualify for an additional £175,000 tax relief, termed the Residence Nil Rate Band.
For married couples and civil partners, the Nil Rate Band can be shared upon the death of the second partner, provided the first didn’t exhaust their own allowance. This arrangement potentially grants a tax-free allowance of £650,000, and the Residence Nil Rate Band can also be shared, offering an additional tax-free allowance of £350,000. This allows home-owning couples with children a potential total of £1,000,000 in tax-free allowances.
Why is more being paid in Inheritance Tax?
Inheritance Tax receipts have displayed an upward trajectory over the last decade. Research by Wealth Club indicates that the average IHT bill could reach £233,000 in the current tax year, affecting over 30,000 estates. This reflects a 9% increase from the average IHT bill three years ago and a 12% rise in the number of estates subject to IHT.
Factors such as escalating house prices, inflation, and a frozen Nil Rate Band allowance contribute to the rising value of many estates, resulting in an annual increase in estates liable to IHT.
Given the current freeze on the Nil Rate Band at £325,000 until at least April 2028, it is crucial for individuals to assess the potential risks of their estate incurring IHT.
Get advice on Estate Planning
If you have concerns about Inheritance Tax, various inheritance tax planning options exist to structure your estate in a tax-efficient manner.
Estate planning can be intricate, and seeking professional advice is advisable to ensure that your intentions for the distribution of your estate upon death are accurately planned.
This article does not aim to be exhaustive or offer specific legal advice. It should not be relied upon without specific advice tailored to individual circumstances.