Freezing inheritance tax thresholds branded ‘kick in the teeth’

Inheritance tax: Graham Southorn explains how trusts can help

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The Chancellor announced the inheritance tax therhold will remain unchanged in his Autumn Statement on November 17, meaning more people will be caught in the net as the price of properties continue to rise. Inheritance tax is charged at 40 percent above the £325,000 nil rate, which will now stay the same until 2028.

Alex Davies, CEO and Founder Wealth Club said it’s not just the super-rich who are affected by these changes, thousands of hardworking families will be worse off.

He said: “Freezing the inheritance tax threshold for yet another two years – until April 2028 – is another kick in the teeth for those wanting to pass down their wealth to loved ones.

“We believe that this extended freeze combined with rampant inflation will increase average IHT bills to £297,793 in 2025 to 26 and to £336,605 in 2027 to 28.

“Contrary to what many think, inheritance tax doesn’t just affect the super-rich. It will be the thousands of hardworking families to bear the brunt, as they get caught in the cross hairs of high property prices and frozen IHT allowances.”

He said figures out just last month show that HMRC raked in £3.5billion in inheritance tax receipts in the six months to September 2022.

Mr Davies added: “This is £400million more than in the same period last year and continues the upward trend. 

“The good news is that with some careful planning there are lots of perfectly legitimate ways you can eliminate or keep IHT bills to the minimum, so more of your wealth is passed on to your loved ones rather than being syphoned off by the taxman.”

One of the first things people should do is create a will and make the most of all the tax breaks available to them.

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Wealth Club shared 11 ways people can pay less inheritance tax:

  • Make a will
  • Use your gift allowances
  • Make regular gifts
  • Leave a legacy – give to charity
  • Use your pension allowance
  • Set up a trust
  • Invest in companies qualifying for Business Property Relief (BPR)
  • Invest in an AIM IHT ISA
  • Back smaller British businesses
  • Invest in commercial forestry
  • Spend it.

Mr Daives explained: “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.

“ISAs are tax-free during your lifetime but when you die, or when your spouse dies if later, they could be subject to 40 percent 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 due in inheritance tax.”

Wealth Club reasearch shows:

  • One in every 25 estates pay inheritance tax, but the freeze on inheritance tax thresholds, paired with inflation and decades of house price increases is bringing more and more into the taxman’s sights. 
  • Wealth Club calculations suggest the average inheritance tax bill could increase to just over £266,000 in the current tax year. This is a 27 percent increase from the £209,000 average paid just three years ago. 
  • While you can pass on money IHT free to your spouse or civil partner, the estate could still be subject to IHT on their death though they may be able to make use of your pass-on allowance.  
  • The main threshold is the nil-rate band, enabling up to £325,000 of an estate to be passed on without having to pay any IHT. This has been unchanged since April 2009.
  • 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 £2million and is not available at all for estates worth over £2.35million.

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