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Inheritance Tax (IHT): An overview

26th July 2024

Inheritance Tax (IHT) is a tax on the estate (the property, money, and possessions) of someone who has died. Here, we provide an overview of the key elements of IHT, including the basics, thresholds, exemptions, reliefs, planning strategies and insights from the Rowleys Tax team on what might lie ahead for IHT under a Labour government.

Basics of Inheritance Tax

When a person dies, their estate may be liable for IHT if its value exceeds certain thresholds. The standard IHT rate is 40%, but this is only charged on the part of the estate that is above the threshold. The Inheritance Tax receipts for April 2024 to June 2024 are £2.1 billion, which is £83 million higher that the same period last year.

Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB)

• Nil Rate Band (NRB) – The NRB is the amount up to which an estate has no IHT to pay. For the tax year 2023/24, the NRB is £325,000.
• Residence Nil Rate Band (RNRB) – This additional threshold can be claimed if the estate includes a home, or a share of one, that is left to direct descendants such as children or grandchildren. The RNRB for 2023/24 is £175,000.

Both the NRB and RNRB are transferrable between spouses or civil partners. This means that if the first partner to die does not use up their full allowances, the unused portion can be transferred to the surviving partner’s estate.

Tax rate

For estates above the NRB and RNRB, the IHT rate is 40%. However, if you leave at least 10% of your net estate to charity, the IHT rate on the remaining estate can be reduced to 36%.

Reliefs available

Certain types of property can qualify for relief, which reduces the value of the estate that is subject to IHT:

• Agricultural Property Relief (APR) – This can apply to farmland and buildings, providing up to 100% relief.
• Business Property Relief (BPR) – This applies to qualifying business assets, potentially offering up to 100% relief. Shares in qualifying businesses listed on the Alternative Investment Market (AIM) can also qualify if held for over two years.

Exemptions

Several exemptions can reduce or eliminate IHT liability:

• Spousal exemption – Transfers between spouses or civil partners are generally exempt from IHT.
• Charitable gifts – Gifts to registered charities are exempt from IHT.

Gifts and Potentially Exempt Transfers (PETs)

Gifts made during a person’s lifetime can also impact IHT liability. Here are some key points to consider:

• Seven-Year Rule – Gifts made more than seven years before death are generally exempt from IHT. If a gift is made within seven years of death, it will count towards the NRB available at death. This is known as a Potentially Exempt Transfer (PET).
• Annual exemption – You can give away up to £3,000 each tax year without it being added to the value of your estate. This can be carried forward one tax year if not used.
• Wedding or civil partnership gifts – These are exempt up to £5,000 for a child, £2,500 for a grandchild or great-grandchild, and £1,000 for any other person.
• Small Gifts Allowance – You can give £250 per recipient per year to as many people as you like, provided they have not benefitted from other exemptions.
• Gifts from income – Regular gifts made out of your surplus income are exempt from IHT if they do not reduce your standard of living.

Lifetime planning

Effective IHT planning can help reduce the liability on your estate:

• Regular gifts and record keeping – Maintain records of all gifts and regular payments to assist with future IHT calculations and filing. Form IHT403 is useful for this purpose.
• Utilising reliefs – Consider investments qualifying for BPR, such as AIM shares, but always consult with an Independent Financial Adviser (IFA) due to the high-risk nature of such investments.

By understanding the various thresholds, exemptions, and reliefs, and by making informed decisions about lifetime gifts, you can effectively plan to minimize your estate’s IHT liability and ensure more of your wealth is passed on to your beneficiaries.

Potential changes to IHT under a Labour government

Looking ahead, there are indications that significant changes to Inheritance Tax (IHT) might be on the horizon under a Labour government. While the Labour manifesto did not explicitly address IHT aside from proposals on offshore trusts, reports suggest that Labour is considering various tax-raising options which could include substantial revisions to IHT rules. Specifically, there is speculation that Labour may propose altering or scrapping Business Property Relief (BPR) and Agricultural Property Relief (APR). These changes aim to increase tax revenue.

It has also been suggested that the government may introduce IHT on pension funds, which are currently exempt from IHT. Along with removing the Capital Gains Tax (CGT) uplift to market value, where the asset also qualifies for an IHT relief such as BPR, providing this isn’t scrapped. Here’s an example of how this currently works:

John Smith owns 100,000 £1 shares in a trading company which on his death are worth £500,000. Under current rules there would not be an IHT liability as BPR would reduce the chargeable value to £nil. However, John leaves the shares to his daughter, Jill. Under current rules, Jill would only pay CGT on a sale if she received more than £500,000.

Additionally, Labour might be considering changes to the treatment of lifetime gifts. Currently, no IHT is due on gifts if the donor survives for more than seven years after making the gift. Modifications to this rule could result in more lifetime gifts being subject to IHT, thereby increasing the overall tax revenue.

Given the negative reputation of IHT, any proposed changes are unlikely to be implemented without thorough consultation. It is rumored that Labour intends to present its reform options to the Office for Budget Responsibility for analysis before announcing any proposals and opening a consultation period. This approach aims to ensure that any reforms are carefully considered and debated before implementation.

Assistance with Inheritance Tax planning

 

If you have any questions about IHT or would like one of our experts to review your position and provide personalised IHT planning recommendations, please get in touch with our friendly team.