Inheritance tax receipts increased to £7.5 billion from March 2023 to April 2024. This is the highest value ever recorded. The figure was a £400 million increase from the same period in the previous tax year.
Although the amount collected has increased only 4% of estates are currently liable to pay inheritance tax. The Institute for Fiscal Studies estimates that the proportion of deaths resulting in inheritance tax is set to grow so that by 2032-2033 one in eight people will have inheritance tax due on their death or on the death of their spouse or civil partner.
Inheritance tax may only be paid by a small minority of tax payers but for those picking up the bill the amounts are eye watering. It is not just wealthy families that are paying. Rising house prices, and inheritance tax threshold freezes mean that more families are paying despite their quality of living remaining the same.
What do you need to know:
1. Anything you leave to a spouse or civil partner is exempt from inheritance tax. You do not have this exemption if you are living together without being married or in a civil partnership. Ken Dodd married his partner of 45 years two days before his death in 2018. He had always been against marriage saying that marriage could lead to complacency and caused some couples to stop putting in any effort. He had been engaged for over 40 years and the thought of the tax savings he could make by being married spurred him on.
2. You do not pay inheritance tax on the first £325,000 you leave to other people. This is because everyone has a £325,000 inheritance tax free allowance.
3. Passing on your home to your children or grandchildren can boost your allowance. This is because if you own a home that you are leaving to children or grandchildren you will have the £325,000 inheritance tax free allowance and in addition you will have a residence nil rate allowance of £175,000. Rod has an estate worth £525,000 including a home worth £200,000. He is leaving his home to his eight children. No inheritance tax will be charged on the first £500,000 (£325,000 inheritance tax free allowance plus £175,000 residence nil rate allowance). There will be a 40% charge on the remaining £25,000 giving a total of £10,000 in tax (assuming you are not leaving anything to charity)
4. Any unused inheritance tax allowance passes to your spouse or civil partner. Rod and Penny have assets worth £1,000,000 between them. Rod dies leaving everything to Penny. Everything he has left to Penny is exempt from inheritance tax. Penny therefore inherits his £325,000 inheritance tax free allowance and his £175,000 residence nil rate band meaning her inheritance tax allowances on death are £1,000,000. On Penny’s death there will be no inheritance tax to pay.
5. There are ways to legally cut your inheritance tax bill.
If you think you might be affected by inheritance tax then take legal advices.
