Cost of living crisis – Don’t forget about Inheritance Tax planning

With all the doom and gloom about the economy, the cost of living rising fast and set to rise even faster, double digit inflation and volatile worldwide stock markets it is easy to forget about the importance of Inheritance Tax planning.

House prices continue to rise and rise but Inheritance Tax free bands have not kept up. The Inheritance Tax ‘Nil Rate’ Band, the amount you can inherit before tax is payable, has not risen from £325,000 since April 2009. With the effect of inflation this sum shrinks in real terms year on year.

The Government has recently received a record amount of Inheritance Tax.  HMRC data on IHT receipts since 2019.

The Treasury received over one billion pounds from Inheritance Tax in April and May this year– up 10 per cent on a year ago.

It is unwise to pin much hope on any changes soon to Inheritance Tax. We may be about to have a new Prime Minister but he or she will be very tied by the tight fiscal situation at present with shortages and the high post pandemic government debt. Politically who knows which way the government will jump especially as there is no need to have an election until 2024.

Inheritance Tax was once viewed as a tax on wealthier individuals, but rising house prices and frozen tax thresholds have dragged many more people into the tax net. People with what they think of as an ordinary house and some savings will find themselves paying Inheritance Tax. It seems unfair as you will have already paid tax on your earnings and your pension.

So, can anything be done?

Firstly, make sure your Will is up to date and takes into account the tax free ‘Nil Rate’ Bands available especially the new Residential Inheritance Tax free band which can add another £350,000 tax free to the estate of a couple with children provided all the conditions are met.

Secondly, look at all your assets including your house and investments, life policies, pensions and death in service benefits. Some assets pass outside the estate for Inheritance Tax. 

Finally, work out how much Inheritance Tax may be payable on your estate after deducting any reliefs or exemptions and the tax-free bands. 

There is no tax payable on assets passing between spouses. The tax payable is usually payable when the second spouse dies, and the assets pass to their children. This means parents will be less able to pass on assets to children for example for a house purchase

Inheritance Tax is also payable on certain lifetime gifts and transfers, mainly on gifts to a trust. On gifts to individuals’ tax is only usually payable if death occurs within the first Seven years so tax planning is possible here so long as you leave yourself with enough to live on for the rest of your life.

Gifts to registered charities are also exempt as are gifts to most political parties.

There are also reliefs available for certain agricultural property and businesses and business assets. The reliefs are generous in that up to 100% of the asset can be relieved for tax but the rules for claiming are very strict and need to be followed closely.

Consult your Independent Financial Adviser if you have one. Some Inheritance Tax planning is based around certain investments such as investment bonds.  Also shares on the AIM (Alternative Investment Market) receive favourable tax treatment. AIM shares can attract tax relief of up to 100% of the value so long as the shares are held for more than Two years and certain other strict conditions are met including the need for the company to be trading. 

The choice of investment should never be governed purely by tax planning. The investment has to provide a reasonable overall return on the money invested. AIM shares in particular can be extremely risky. You need to take specialised professional advice.

For many people the summer months are when things quieten down somewhat from busy work schedules, and this presents an ideal opportunity to consider your tax liability and how this can be reduced for the next generation. The most important this is to take professional advice.

How Moore Barlow can help

We know that financial decisions and arrangements can be stressful, often impacting your personal and professional life. That’s why at Moore Barlow we approach each case with sensitivity and respect, talking you through the different options and finding a solution that works for you.

By choosing Moore Barlow you will have access to an abundance of expertise, providing you with an unrivalled legal service. Contact our Private Wealth Team now.