In the Autumn Statement, the Chancellor announced that Inheritance Tax (IHT) will be frozen at their current levels for a further two years to 2028.
What is Inheritance Tax?
IHT is a tax on the estate (the property, money, and assets) of someone who’s died.
The tax is paid by the estate but affects the amount your beneficiaries could receive.
The IHT Nil-Rate Band is set at £325,000 per person, and £650,000 for married couples, provided the first of the couple to die passes their estate to their spouse. The Residential Nil-Rate Band of £175,000 can extend this to £500,000, or one million pounds for a married couple, where a main property is passed to direct descendants.
How is Inheritance Tax affected by the Autumn Statement?
Until 2028, your assets will continue to grow, but the thresholds remain unchanged. As a result, far more estates are likely to be caught out by IHT, especially if house prices rise.
The freeze means that people who had previously hoped that thresholds would rise in 2026, may need to take additional steps to ensure their estate isn’t heavily taxed.
It is possible that a large proportion of your estate may be affected. Thus, you should begin to think about IHT at an earlier stage in your life as many who were not previously likely to be affected now are.
With this in mind, it would be beneficial to consider how to plan around IHT and the things that can be done to lessen its impact.
What can you do to reduce the Inheritance Tax liabilities?
There are several ways in which you can reduce your IHT liabilities in later life.
One way of doing so is giving gifts of up to £3,000 per year. This will be tax-free and covered by annual exemptions.
This may consist of payments to help with someone’s living costs, such as someone under the age of 18, but this can also include Christmas or birthday. You are also entitled to give various amounts as wedding gifts without incurring tax, depending on the relation.
Any gifts of £3,000 or a higher value in any one year may be subject to the seven-year rule. This means that these gifts count towards the value of your estate, and you could be charged IHT if you give away more than your nil rate band allowance in the seven years before your death. If you give away less than your Nil Rate Band the gifts will still count towards your allowance, but there may not be IHT payable depending on the other assets in your estate.
If you choose to give away gifts to charity, equal to 10 per cent or more of your estate, you only pay IHT at a rate of 36 per cent.
Other ways which may allow you to reduce your IHT liability include trusts, Business Property Relief, and Agricultural Property Relief.
For advice on related matters, contact our team today.
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