Inheritance tax (IHT) is a tax on the estate of someone who has passed away. This includes all property, possessions and money. The IHT rate is 40% and is only charged on the value of the estate that is above the tax-free threshold, this is currently £325,000 and is called the ‘nil rate band’. There is a further allowance of £175,000 called the ‘residence nil-rate band’, a ‘top up’ allowance of up to an additional £175,000 is available to offset against a main residence that it is left to a direct lineal descendant, e.g your child/children or grandchildren.
There is no IHT to pay if the value of your estate is below the threshold. However, you will still need to report the estate’s value even if it’s below when applying for probate. These thresholds for inheritance tax have been frozen until 2028, and as such, in 2022, IHT receipts were up by 14% from the previous year.
In this guide, we will further explore the current IHT rates, expanding on inflation, property and tax freezes. Read on to find out what the latest developments in inheritance tax might mean for you.
During this time of financial crisis in the UK, increasing inflation is causing many issues for families across the country. In fact, October 2022’s inflation peak was the highest annual inflation rate since 1981. HM Revenue and Customs also posted a new record for IHT receipts, as they had increased to £70.9 billion in April 2023. This is £1.8 billion higher than the same period the previous year.
The nil-rate band has been frozen at £325,000 for over a decade now. This has left families facing larger IHT bills following the passing of a loved one. With the nil-rate band staying frozen until 2028, IHT is expected to grow to a further £8.3 billion until then.
The residence nil-rate band applies to your main property. To qualify, you must have lived in the property at some point in your life. The residence nil-rate band offers an additional up to £175,000 allowance.
If you are the owner of more than one property, the appointed executor can choose which property the RNRB should be offset against.
There are limits to the residence nil rate band, for every £2 that your estate equals over £2 million, the property allowance will reduce by £1.
The freeze on allowances is one of the major factors causing the rise in IHT. The freeze was initially introduced in 2021 by the then Chancellor, Rishi Sunak. The IHT threshold freeze was previously set until 2026, but this was extended until April 2028 after the current Chancellor, Jeremy Hunt’s Autumn statement.
With inflation skyrocketing and vast increases in property values in the UK, the freeze means that more and more people will surpass the inheritance tax threshold. This is why the extension of the tax freeze has been met with much criticism. It not only means that there is a large tax bill to pay, but residuary beneficiaries will receive less money from an estate and undoubtedly there will be an increase in costs to administer the estate and for lay executors, a more complicated estate to administer.
Inheritance tax should always be considered in the Will making process. Without a Will, the estate may be distributed in a way that is not in line with your wishes. As we are not tax advisers, the engagement of an outside tax adviser may be appropriate to compliment your wishes.
Contact us today for more information on how we can help with your inheritance tax issues.