Following Jeremy Hunt’s decision to freeze Inheritance Tax (IHT) thresholds for a further two years until April 2028, IHT is once again under the spotlight. Rising house prices and soaring inflation, combined with the extension to the frozen thresholds, mean that more estates are likely to be impacted, not just those of the hugely wealthy. Recent IHT figures detail total HM Revenue and Customs (HMRC) receipts for April 2022 to September 2022 were £3.5bn, £0.4bn higher than in the same period in 2021.

IHT is a tax payable on all your assets (less eligible debts) when you die and potentially on some gifts you make during your lifetime. If the estate is liable for IHT, it is usually payable at 40% on the value above a specified threshold.

Threshold refresh

An individual’s current threshold, or nil-rate band, is £325,000. A couple (married or civil partners) has £650,000. Any unused nil-rate band can be passed to the surviving spouse or civil partner on death. Six years ago, the government introduced an additional nil-rate band when a residence is passed on death to a direct descendant. The main residence nil-rate band is £175,000 and when added to the existing threshold of £325,000 could potentially give an overall allowance for individuals of £500,000.

In order to reduce the amount of IHT payable, many people consider giving assets away during their lifetime. Some gifts will be automatically free from IHT; for example, £3,000 each financial year, certain wedding gifts and gifts to charities.

Don’t tip the balance though

Getting the right balance between gifting money during your lifetime and ensuring you have enough for your future years requires careful planning. Expert planning can legitimately mitigate IHT, meaning you can pass on assets to your family as you’d intended.