Reports of government discussions around inheritance tax (IHT) reform have been circulating, with speculation that it could be abolished altogether.

HMRC reported £3.2 billion in IHT receipts between April and August 2023, which is an increase of £300 million compared with the same period in 2022.

It is interesting that a reduction is being discussed considering these figures, particularly when you factor in the focus on intergenerational wealth. In the UK, those over the age of 65 collectively possess property worth £2.587 trillion, and over 50s possess 78% of all the UK's privately held housing wealth.

Many of these people who bought property between the 1960s and 1980s have since seen the value of their property rise exponentially, meaning the value of the assets passed to the next generation will be significant. Projections from the Office for Budget Responsibility suggest IHT receipts will reach £7.8 billion in 2027-2028.

Whether or not anything comes from the rumours that IHT is to be scrapped remains to be seen. However, it will inevitably give rise to increased discussion on matters of intergenerational wealth and the impact on the UK property market. For now, it is as important as ever to keep your affairs under review and to make yourself aware of several allowances already in place which may reduce IHT liability or exempt an estate altogether.

Nil-Rate Band

The nil-rate band (NRB) is currently £325,000, meaning IHT is not payable on the first £325,000 of an estate, and everything above this will be charged at a rate of 40% – the current rate of IHT.

The residence NRB (RNRB) is an additional relief of £175,000 granted when the family home is left to a child or other direct descendant in a will. This amount is frozen until April 2026, as per the 2020 UK government budget. This amount is not available for all estates, it will be tapered by £1 for every £2 over £2 million.

A will can be written is such a way that on the death of an individual, their entire estate will be left to their spouse or civil partner. This is exempt from IHT. This allows the first spouse’s NRB and RNRB to transfer to the other spouse, so that on the second death both allowances combine and married couples or civil partners can have an estate exempt from IHT of up to £1 million.

Lifetime Gifts & Charity Donations

Potentially exempt transfers (PET) are gifts made within lifetime which may fall back into an estate if they have been made within seven years of death. Gifts of up to £3,000 per year can be made without falling back into the estate, and there are further exceptions of gifts of up to £250 per person per year. Additionally, donating at least 10% of your estate to charity will reduce the rate of IHT payable on your estate to 36%. It is important to be aware that from April 2024, this will be restricted to UK charities only. For more information on IHT planning, including agricultural and business property relief; trusts; lifetime gifts; and gifts to charities; please see our previous blog.

For more advice on inheritance tax planning, please reach out to our private client team who will be delighted to help explain, advise, and implement measures to manage your personal affairs.

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