After the UK government’s tax authority released its inheritance tax receipts for the period April to June 2023 on Friday – showing another rise on the previous year’s levels, and with the IHT threshold being frozen until 2028 – wealth managers look at what can be done to mitigate IHT liability.

Latest figures from the UK’s tax authority HMRC show that inheritance tax receipts hit £2 billion ($2.6 billion) from April to June 2023, up £200 million from the same period a year earlier, continuing the upward trend.

These figures show how much the government’s inheritance tax take seems to be rising, due largely to years of house price increases, soaring inflation, and tax freezes which have pushed an increasing number of families that would not consider themselves to be wealthy above the threshold for inheritance tax. In 2019/20 inheritance tax bills averaged over £200,000 for those who paid them, and the total inheritance tax take has increased since then, totalling £7.866 billion last tax year, Wealth Club said on Friday. 

But with asset prices falling, many families could find they have overpaid. If properties or shares were valued back in 2022, but are only now being sold, Wealth Club believes that there is a strong chance that they are being sold for less than the value on which inheritance tax was paid. 

“HMRC continues to see its inflows increase, month-after-month and year-after-year. But as house prices start to fall, we may see beneficiaries paying more inheritance tax than they really should. Fortunately, there are two forms that can help you to claw back any of that overpaid inheritance tax,” Nicholas Hyett, investment manager at Wealth Club said.

This includes the loss on sale relief. “An IHT25 form can be used to claim back on the sale of qualifying investments such as shares. Lengthy delays in processing probate are making it difficult for people to claim and there are calls for ministers to extend the 12-month claims window,” Hyett continued.

“The perhaps lesser known IHT38 form, which was used by just 3,000 people last year, allows you to claim back money on the sale of a property or land, to ensure beneficiaries are paying tax on the actual sale price and not its valuation at the time of death. Beneficiaries have four years from the date of death and could potentially save tens of thousands on some larger estates, especially now house prices are falling,” he said.

Rumours that the government might be considering scrapping inheritance tax altogether could eventually clear up the backlogs. But the reality is that in some circles, inheritance tax is already considered a voluntary tax, thanks in large part to government sponsored schemes designed to encourage investment into crucial parts of the UK economy, Wealth Club continued.

With IHT being one of the most important taxes that a high net worth individual is likely to contend with, Wealth Club looks at what can be done to mitigate IHT liability:
 
•    Giving money away early. Gifts taken out of regular income, which are not deemed to affect the giver’s standard of living, are inheritance tax free on day one – as are certain smaller gifts. Timing is key as you can give unlimited amounts away but typically these take seven years to be completely inheritance tax free. Of course, once you give away the money you’ve lost control. If you need it back for an emergency, that’s not an option.

•    Investing in companies that qualify for Business Property Relief. These are typically inheritance tax free after two years. Investing in unquoted businesses can be risky, however, unlike giving the money away, you retain control.

•    Investing in an AIM ISA. ISAs are not inheritance tax-free. When you pass away, your loved ones could miss out on 40 per cent of your hard-earned cash. AIM ISAs are a popular way around this. They are riskier but after two years they could be IHT free.

“The government’s decision to freeze the nil-rate bands for inheritance tax out until 2028 means an increasingly large number of estates now owe this tax after death. The IHT receipt figures once again show the highest monthly total on record, and that trend of rising receipts looks well set to continue. There are ways and means for IHT to be mitigated, such as via trusts or Business Relief-qualifying AIM portfolios, for which we have seen a big uptick in demand. As ever though, only those with access to professional advice are aware of these options,” Ian Woolley, head of AIM Services at Hawksmoor Investment Management, said.

“The stats show the increasing burden being put onto the British taxpayer. We are seeing income tax takings increasing at 11 per cent year-on-year whereas average pay growth is currently at 7 per cent for the private sector and 4.8 per cent for the public sector showing fiscal drag is resulting in a higher proportion of people’s pay being taken in tax. With the personal tax rate bands being frozen until April 2028, it is likely that this is only going to get worse,” Joe Neal, tax manager at tax and advisory firm Blick Rothenberg, added. 

IHT remains a major tax and estate planning concern for wealth advisors. One issue that has been flagged is how individuals with UK-based assets, and who have put those assets into foreign trusts, can still be hit and may have costly tax bills if they haven't taken hold of their affairs. See an example here.