What is inheritance tax?

Inheritance tax (IHT). It sounds daunting, doesn’t it? But what actually is IHT? Essentially, IHT is a tax on the estate of someone who has died, including all property, possessions and money. The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the tax-free threshold which is currently £325,000. There’s also an additional residence nil-rate band of up to £175,000 for homeowners who pass their house onto direct decedents, such as children and grandchildren. There are certain conditions that you must meet to qualify for residence nil rate band, but you don’t necessarily have to own a home at the point you pass away.

HM Revenue & Customs recorded a £700mn uptick in inheritance tax (IHT) receipts between April and December last year, totalling a whopping £5.3bn. This has prompted experts to predict another potentially “record-breaking” year. Some have forecast this could net the government more than £1bn, with the average inheritance tax bill reaching £304,567 by 2025-26 and £345,084 by 2027-28, according to research by Wealth Club.

Let’s say you’re not married and worth £700,000 when you die. In your will, you’ve outlined the beneficiaries of your estate. Putting into consideration the nil-rate band and the residence nil-rate band, before anything can be passed down, there’ll be a tax bill of £80,000. And this needs to be paid within 6 months from your death. So if a lot of your money is locked into properties, they would need to be sold and the inheritance tax liability paid before you could distribute any money to anyone else. It just doesn’t seem fair does it? Especially during an already difficult time.

Two IHT exemptions are currently frozen until 2027/2028: the nil-rate band (£325,000) and the residence nil-rate band (£175,000). With rising asset prices, a heated housing market, what do the government expect us to do? The nil-rate band of £325,000 has been in place since 2009, so come 2026 and it’ll have stayed the same for 17 years. Recent data from Halifax depicted that over the past 40 years, house prices have risen a staggering 874% since early 1983. Meaning many have seen their properties go up enormously in value. Whilst they might not consider themselves wealthy, they will end up paying inheritance tax, typically viewed as a tax for the very affluent.

So besides the obvious – paying tax – what makes IHT so bad? Well, we think there are two reasons:

1. Over the years, as a country, we’ve experienced inflation. This means that people’s wages and house prices have risen significantly. But the allowance hasn’t risen with it; which means more and more people are falling into the bracket of people who will be taxed.
2. Throughout our lifetimes, most of our estate will have already been taxed before… sometimes more than once. Which means, after paying our fair share, the government are taking an additional 40% off assets they’ve already taxed!

However, you don’t need to panic. There are many legal ways to find your way around an IHT bill, you’ve just got to know how to do it, but we don’t have enough space for that right now. That’s why we created this guide that’ll introduce to you what you can and can’t do when trying to reduce a potential tax bill. If you’d like a free copy, please click here to order your guide.

Please note

The FCA does not regulate, tax planning, estate planning, inheritance tax planning, cashflow modelling or wills. The value of your investments can go down as well as up, so you could get back less than you invested.

All information is correct at the time of writing and is subject to change in the future.