After the UK government's tax authority released its inheritance tax receipts for the period April to October 2022, showing a sharp rise on the previous years’ levels, and as the IHT threshold is 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 in the months from April to October 2022 reached £4.1 billion ($4.88 billion), up £500 million from the same period a year earlier, continuing the upward trend. 

These figures were released days after the Autumn Statement in which it was announced that the inheritance tax threshold of £325,000 will be frozen until April 2028, on top of the current four-year freeze.

These new figures demonstrate how much the government’s inheritance tax take seems to be increasing, due largely to the steady increases in house prices which are pushing more regular hardworking families above the threshold who are relying on money being passed down through the generations.

There is also a Residence Nil Rate band worth £175,000 which allows most people to pass on a family home more tax efficiently to direct descendants, although this tapers for estates over £2 million and is not available at all for estates worth over £2.35 million.

While the average bill is currently £216,000, research conducted by Wealth Club shows that with this extended freeze combined with soaring inflation, average inheritance tax bills are conservatively estimated to reach £297,793 by 2025-26 and £336,605 by 2027-28.
 
Alex Davies, CEO and founder of Wealth Club said: “There has been a total U-turn on inheritance tax over the last few months. From Liz Truss raising the hopes of the nation with a cut back in September, and now Jeremy Hunt announcing the extension of the freeze until 2028. The treasury hopes by leaving rates and allowances unchanged, inflation can do the hard work of turning the temperature up on taxpayers without them noticing.”
 
“More and more families are going to find themselves hit by death duties they might not have expected or planned for,” he continued.

With inheritance tax 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.

-    Making a will is the first step you should take. Without it, your estate will be shared according to a set of pre-determined rules. That means the taxman might end up with more than its fair share.

-    Use your gift allowances: every year; you can give up to £3,000 away tax free. This is known as the annual exemption. If you didn’t use it last year, you can combine it and pass on £6,000. 

-    Make regular gifts: you can make regular gifts from your income. These gifts are immediately IHT free (no need to wait for seven years) and there’s no cap on how much you can give away. 

-    Use your pension allowance: pensions are not usually subject to IHT for those under 75 years old – they can be passed on tax efficiently and, in some cases, even tax free.     

-    Set up a trust: trusts have traditionally been a staple of IHT planning. Money can fall outside an estate if you live for at least seven years after establishing the trust. 

-    Invest in companies qualifying for Business Property Relief: if you own or invest in a business that qualifies for Business Property Relief – the majority of private companies and some AIM-quoted companies do – you can benefit from full IHT relief. You must be a shareholder for at least two years and still be on death though.

-    Invest in an AIM IHT ISA: ISAs are tax free during your lifetime but when you die, or when your spouse dies if later, they could be subject to 40 per cent IHT. An increasingly popular way of mitigating IHT on an ISA is to invest in certain AIM quoted companies which qualify for BPR. You must hold the shares for at least two years and if you still hold them on death you could potentially pass them on without a penny being due in inheritance tax.

-    Back smaller British businesses: the Enterprise Investment Scheme and the Seed Enterprise Investment Scheme offer a generous set of tax reliefs. 

-    Invest in commercial forestry: this is an underused option for experienced investors. Pension funds and institutions have long ploughed money into forestry. The Church Commissioners has a forestry portfolio worth £400 million. Commercial forest investments should be free of IHT if held for at least two years and on death.

-    Leave a legacy: give to charity. If you leave at least 10 per cent of your net estate to a charity, you may be able to get a discount on the IHT rate – 36 per cent instead of 40 per cent. 

Laura Tommis, business and relationship development manager at ZEDRA, said: “The Chancellor’s Autumn Statement did not afford any immediate further reliefs against IHT and, with the Nil Rate Band allowance now expected to remain at its current level until 2028, careful lifetime planning remains essential to any families looking to mitigate their IHT liability.” 

“A professionally drafted and up-to-date will should be the starting point to estate planning and can ensure any IHT reliefs are effectively and flexibly utilised on a testator’s death. Similarly, obtaining good professional advice on utilising lifetime IHT reliefs via controlled gifting of capital and/or surplus income via trusts can have a powerful impact on a family’s overall IHT liability, as well as mitigate the beneficiaries’ own IHT liability whilst still providing access to the funds if needed,” she continued.