UK Inheritance Tax Receipts Reach Record Highs – Tips To Reduce Your Bill

Inheritance tax (IHT) receipts are rising at an ‘alarming rate’, hitting £5.3 billion over the past year to the end of February, new figures show. The IHT haul over the period is a record high, representing a rise of 13 per cent year-on-year, as the chart below shows.

The record sums in tax receipts put pressure on chancellor Phillip Hammond to follow through on plans to reform the system. In late January Hammond ordered a review of IHT, although detail was light in terms of timescale and there was no mention of an increase in the IHT threshold, which has remained at £325,000 since 2009.

Indeed, the static IHT threshold along with rising property prices have been the big drivers behind an increasing number of individuals having to pay death duties.

To address the latter issue the government introduced the so-called residence nil rate band (RNRB) which we cover further down the page.

Who Has To Pay UK Inheritance Tax?

Anyone, whatever nationality, with assets in the UK worth more than £325,000.

Anyone with a UK ‘Domicile of Origin’ (i.e. they or their father were born in the UK) will nearly always have to pay UK Inheritance Tax on not just their UK based assets but on their worldwide assets as well. This includes expats as well as UK residents.


Tips for reducing your exposure

Estate planning can be a complicated process, especially as rules and legislation seem to change every year. But with the right forward planning, it is possible to significantly reduce or even eliminate your IHT liability.

Under current legislation, Inheritance Tax is usually paid at 40% if a person’s estate (broadly their property, money and possessions) is worth more than £325,000 when they die. This is transferrable between spouses and civil partners, so a couple can pass on £650,000 free of inheritance tax.

You can reduce the taxable value of your estate over time by lifetime gifting. Gifts are typically made directly to the recipient but could also be to trusts, ISAs and Junior ISAs, or pensions, as part of longer-term financial planning. Here are 8 tips for reducing your estate’s exposure to the tax man:

  1. Potentially Exempt Transfers – you can gift any amount to any individual or organisation free of any tax so long as you survive 7 years from the time you made the gift. This means that you can pass property or assets to your loved ones whilst you’re still alive and see them enjoy your gift.
  2. Whole of Life Policies – It is possible to set up a life insurance policy and place it in trust to pay HMRC your estimated tax bill. This means that it is a life insurance provider, and not your estate that ends up footing the bill to HMRC.
  3. Trusts – Depending on the type of asset that you hold, there are several trusts that can be used to reduce your estate’s exposure to Inheritance Tax. This is something that a qualified financial adviser can help you with.
  4. Small gifts – in each tax year you can gift up to £250 to any number of people completely free of IHT, as long as they haven’t received a gift which uses one of the other exemptions listed above.
  5. Donations to charities or political parties – gifts to these types of organisation, either during your lifetime or via your Will, are exempt from inheritance tax.
  6. Annual exemption – in each tax year, you can make a gift of up to the annual exemption of £3,000. On top of this, any unused exemption from the previous tax year can also be used, so if you are utilising both years’ exemptions, up to £12,000 per couple can be gifted in this way.
  7. Gifts from income – you can make regular gifts out of income completely IHT free. These gifts must be from your post-tax income, be habitual, and leave you with sufficient income to maintain your standard of living. Please note this specifically excludes income being drawn from Life Assurance Bonds.
  8. Marriage gifts – parents and grandparents can make one-off gifts on the marriage of children or grandchildren (up to £5,000 and £2,500 respectively). If you aren’t a parent or grandparent, you can still gift up to £1,000 within this exemption.

The Residence Nil Rate Band

For deaths on or after 6 April 2017, a new residence nil rate band is also available in addition to the standard nil rate band of £325,000.

The residence nil rate band is the net value of the home (i.e. after any outstanding mortgage or other relevant liabilities have been deducted) to a maximum of:

  • £100,000 for 2017/18
  • £125,000 for 2018/19
  • £150,000 for 2019/20
  • £175,000 for 2020/21

Therefore from April 2020, there is the potential for a married couple or a couple in a civil partnership to leave £1 million of their estate IHT-free to their direct descendants. This is in the form of their nil rate band of £325,000 each (£650,000) and their main residence nil rate band of £175,000 each (£350,000).


Let Our Advisers Help You Out

As estates get larger and more complicated, advice from a professional could prove invaluable. W1 Investment Group has a team of Financial Advisers across in the UK, Brussels and Qatar who can help you navigate the rules, minimise the tax payable and increase the amount to be paid to your loved ones. Tax rules can change and any benefits depend on personal circumstances.

By Sam Brooks, Private Client Adviser

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