Are you getting caught in the Inheritance Tax threshold?

According to the latest official figures, average house prices rose by 5.5 per cent from February 2022 – February 2023, taking the average price of a property to £288,000.

That’s £16,000 higher than it had been a year earlier – and this surge in house prices has had wide-ranging consequences, most notably, pricing many people out of buying a property.

But it’s also having a huge impact on those who are already on the property ladder, in an area that most homeowners may have overlooked – Inheritance Tax.

We’ve asked Paul Darley, Managing Director, to share his thoughts on the current Inheritance Tax (IHT) threshold, and outline what you can do to help reduce your tax bill.

Over to you Paul…

The current IHT threshold is £325,000. That means if the value estate falls below this amount, then there would be no Inheritance Tax to pay.

Worryingly however, this threshold has remained frozen now for more than a decade – despite soaring house price inflation over this period.

As a result, more and more people are finding themselves liable to pay IHT, which has led to many labelling it a “stealth tax”.

The government managed to raise £7.1 billion from these tax bills during the last financial year, according to HM Revenue and Customs. This is £1 billion more than the amount collected in 2021-22!

These figures will almost certainly reignite the debate about IHT, and whether the system that is currently in place is fair, especially given the current economic climate.

At the same time, they highlight exactly why it’s so important for people to get their finances in order, if they wish to avoid getting caught up in the Inheritance Tax net.

The Treasury has insisted the “vast majority” of estates do not pay Inheritance Tax, claiming that “More than 93 per cent of estates are forecast to have zero Inheritance Tax liability in the coming years”.

What you can do to help reduce your IHT bill

With inflation remaining high and the Inheritance Tax threshold staying frozen until at least 2028, it does make you wonder how long this line can hold remains to be seen.

For those who are concerned about how the rising value of their home might affect their Inheritance Tax liability, I’ve put together some key pointers for you to consider to try and help reduce your IHT bill:

Ensure you have a will written

It’s paramount before you choose how to spread your wealth out that you have a will written, so that you can decide what you leave and to whom. If a will isn’t put in place, then the government will decide what happens for you.

Build up your pension pot

You might not be aware, but your family are able to access your pension pot after you pass away. As pensions aren’t usually part of your taxable estate, your family won’t be liable to pay any tax from earnings through your pension.

Put assets into a trust

Another option is to put assets you want to gift to loved ones into a trust. A trust is a legal agreement, where you decide who manages the money (trustees) and who benefits from the money left (beneficiaries). There will be charges upon setting up the trust, when any property leaves the trust and on certain anniversaries, but utilsiing a trust allows you to have money and belongings outside of your estate, meaning assets put in a trust won’t be taken into consideration for your IHT bill.

Gift, gift, gift

Did you know that you are able to give away up to £3,000 each tax year without it being added to the value of your estate? You also have the option to give this gift to just one individual, or split between a number of people.

The £3,000 annual allowance can also be rolled over, so if you didn’t gift anything the year prior, you can gift a total of £6,000 in the current year, but this does only last for one year.

Don’t forget the 7-year rule

It’s important to note that if you do go over the IHT threshold, then your gifts will only be free from IHT if you live 7 years from the original date of gifting.

WE are here to help

If you have started to wonder about how to reduce your Inheritance Tax bill but aren’t sure where to start, we can help. To arrange a meeting with one of our friendly advisors, get in touch here.