The repeal of IHT that never was… – Inheritance Tax

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Inheritance Tax (IHT) cuts in the Autumn Budget 2023 failed to materialize as the media had expected. It has been suggested that the chancellor intends to either cut the 40% rate or raise the inheritance tax threshold.

Jeremy Hunt is widely believed to have made the U-turn as a result of the IHT tax, which was expected to raise almost £10 billion a year by the end of the decade. The Office for Budget Responsibility has revealed that the tax levy of £7.1 billion in 2022-23 is forecast to reach £9.8 billion by 2028-29, an increase of 38%.

What is IHT?

In very simple and basic terms, IHT is tax on the estate (property, money and property) of someone who has died.

Usually no IHT is payable if:

  • The value of your property is below the threshold of £325,000 or

  • You leave anything above the £325,000 threshold to your spouse, civil partner, charity or community amateur sports club

You may need to report the value of the property even if it is below the threshold.

If you gift your home (in your will) to your children (including adopted, foster or step-children) or grandchildren, your limit can increase to up to £500,000 (if certain criteria are met).

If you are married or in a civil partnership and your assets are worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die.

Inheritance tax rates

The standard rate of IHT is 40%. This is only charged on the part of your assets that is above the threshold.

Example

Your property (which does not include real estate) is worth £400,000 and your tax-free threshold is £325,000. The IHT charge will be 40% of £75,000 (£400,000 minus £325,000).

The estate can pay IHT at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net worth’ to charity in your will. (Net worth is the total value of the property less any debts.)

Exemptions and exemptions

Some gifts you make while you are alive may be taxed after your death. Depending on when you made the gift, ‘cone relief’ may mean that the IHT charged on the gift is less than 40%.

Other reliefs, such as business property relief and farm property relief, allow some assets to be passed on without IHT or with a reduced account.

Who pays HMRC tax?

Funds from your estate are used to pay IHT to HM Revenue and Customs (HMRC). This is done by the person handling the estate (called an “executor” if there is a will).

Your beneficiaries (the people who inherit your estate) usually don’t pay inheritance tax. They may pay related taxes, for example if they receive rental income from a house that was left to them in a will.

People you give gifts to may have to pay IHT, but only if you give away more than £325,000 and die within seven years of the gifts.

How could the government ease the burden of IHT in the future?

Reduce the IHT rate from 40% to 20%. It is estimated that this could save taxpayers £15.4 billion over the next three years.

The current IHT threshold has not been increased since 2009, when inflation was significantly lower. The IHT threshold could be raised to £500,000 for each individual, rather than just raising the threshold for those who leave their home to their children. An increase in the threshold would mean that an estimated 12,500 homesteads would not be subject to IHT.

What can I do in the meantime?

Lanyon Bowdler recommends reviewing your will at least every three to five years to make sure it still meets your needs and wishes.

Our private client team is highly experienced and is rated Tier Two in The Legal 500 and Band One in the Chambers UK HNW Guide. With extensive experience in tax planning and wealth protection, we can ensure that your will is prepared in the most tax efficient way, taking into account the ever-changing tax laws, including IHT.

The content of this article is intended to provide a general guide to the issue. Professional advice should be sought regarding your particular situation.

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