Inheritance tax allowance freeze: What does it mean?
As announced in the Autumn statement by Chancellor Jeremy Hunt, the government have made the decision to freeze the inheritance tax (IHT) thresholds for two more years. But what does this mean?
IHT is the amount an individual is allowed before inheritance tax is payable, has now frozen until April 2028. An individual has a nil rate band allowance of £325,000 before inheritance tax is payable at 40%, and in addition to this we have the residence nil rate band currently set at £175,000 per individual where a family home is left to direct descendants, usually children, although there are other persons who can fall within this category. The allowance of £325,000 has not changed since 2009, and with inflation and increasing house prices will mean more families will now face paying Inheritance Tax over the coming years.
The intent is to try and claw back government money and is anticipated to save the government around £1bn. House price increases have meant that the number of people paying IHT has been rising for several years now. As the house prices have increased more people have entered the bracket due to their property wealth increasing.
While house prices may soon slow due to the never-ending list of financial concerns facing the UK such as inflation, energy prices and an unpredictable European war, this is unlikely to take the sting out of IHT bills for some time.
The challenge comes as the government, while trying to rectify their own bank balances following the pandemic, have inevitably ensured more people will struggle. One hope we could look for is an announcement to also increase gifting allowances to enable younger generations to access help from the Bank of Mum and Dad or even the Bank of Grandma and Grandad.
There are a few ways to offset some of your estate value to ensure you pay a little less IHT, though these are always done under professional estate planning advice, which we can help refer you for.
Here are a few ideas you may consider:
- Gift your money to loved ones
- There is a limit on how much you can give away annually, and provided there is 7 years clear between gifting and your death it will be exempt from taxation, but should you die in that period it may become liable for tax payment.
- Leave money to a charity
- Any money you leave to a charity, providing it is registered in the UK, will always be free from inheritance tax. The same goes for gifts to political parties, or to local sports clubs. What’s more, if you leave more than 10% of your taxable estate to one of these groups in your will, the inheritance tax rate for the rest of your estate will fall from 40% to 36%. The 10% only applies to the amount of your estate over the IHT allowance. So, for example, if you were leaving behind £425,000, you would benefit from the lower rate if you gave more than £10,000 (10% of the amount over £325,000).
- Leave your estate to your spouse
- Your spouse or civil partner will never have to pay tax on assets you leave them, regardless of the amount. Making the most of this in your will can save your family a small fortune. When your spouse then passes away, they will have inherited your unused IHT allowance, potentially allowing them to pass on up to £650,000 tax-free.
Speak to us today to discuss your estate planning needs and we may refer you to our trusted estate planning partners.
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The Financial Conduct Authority does not regulate taxation and trust advice.
* https://www.which.co.uk/money/tax/inheritance-tax/avoid-inheritance-tax-a4z5q8k6vkp7