Recent HMRC figures highlighted an increased revenue from inheritance tax (IHT) receipts this year, with a total revenue of £2.7bn between April and August, a 35% increase on the same period last year.
Strong growth in house prices in addition to the current freeze on both nil rate bands (NRB) and residential nil rate bands (RNRB) allowances until 2026, means a greater number of estates will become subject to IHT.
This means it is imperative to consider wealth planning options to mitigate any future potential IHT exposure. Equally important is to consider how the loved ones left behind will finance any tax bill outstanding.
IHT regime and planning
The IHT regime had its introduction in 1986 (following the 1984 Inheritance Tax Act), Since this time two important changes are (i) the transferring of NRBs for spouses and civil partners; and (ii) the introduction of the RNRB where homes are transferred to direct descendants.
The initial step is to check what your IHT position is. Depending on the circumstances an individual could be entitled to an effective NRB of anything between £325,000 and £1,000,000.
When considering IHT it is also important to have a will. This is not just for potential planning, but it ensures a person’s estate does not fall into the intestacy rules – where a person dies without leaving a valid will these rules decide how the estate is distributed.
This would mean that the spouse exemption (and NRB) may not cover all of the estate and so some inheritance tax may be due.
One planning point with regard to wills is where a certain amount is left to charity, the IHT rate is reduced from 40% to 36%.
With regard to lifetime planning this is certainly an area to watch in the AUtun Budget, delivered at the end of this month. There are currently a number of ways to mitigate IHT during a person’s lifetime. The main ones being:
- potentially exempt transfers (PETs) – ie, making gifts and then surviving seven years;
- annual exemptions of £3,000; and
- making regular gifts out of excess income.
However, in January 2020 the All-Party Parliamentary Group reviewing IHT published its report. Among other things, while it advised that spousal exemptions remain, while PETs and regular gifts out of excess income should be abolished and replaced with larger annual exemptions (the example given was £30,000 with a tax charge on amounts above this).
Given the position the Chancellor is in, one could imagine this sort of change appealing. It would potentially mean that tax collected from wealthier families would rise, but with no impact on the vast majority of people.
Financing the IHT bill
Estate planning for tax efficiency can only go so far, and the reality is that the wealthier the estate the more difficult it becomes to avoid paying IHT. Given IHT has to be paid within six months, the question of how executors and beneficiaries can find the necessary funds to settle any tax due arises.
It is possible that sufficient cash exists among beneficiaries, but given that the average IHT bill now exceeds £200,000, it is unlikely that this is a realistic and viable option for most estates as high net worth individuals are often asset rich but cash poor.
There are specialist probate bridging loans that can be utilised to help pay the tax bill or the most obvious route would be to sell some of the inherited assets. The latter is not always a desired option.
Depending on the value of certain assets within the estate, cash can be released from an estate in order to pay for IHT. These short-term loans are not secured on the individual borrower but instead against the estate itself using an equitable charge.
Such a solution also provides beneficiaries with the opportunity to advance funds from a forthcoming inheritance, for other more personal time-sensitive spends such as investment opportunities, private medical care, or school fees.