You may have an Inheritance Tax issue that you are unaware of. Here’s why

As the value of your investments and properties continues to grow, you may feel increasingly confident about having a comfortable retirement.

While this is good news, if you pass away leaving a substantial inheritance to your children, some of what you leave behind could be lost to an Inheritance Tax (IHT) bill.

What’s more, a combination of key elements – which we will explore in this article – could mean your future IHT liability is increasing as we speak.

Importantly, families who previously believed they may not need to pay IHT could now be being pushed above the tax-free threshold.

This is already happening; HMRC reports that there was a 17% increase in the number of families who paid IHT in 2020/21, compared with how many paid it in 2019/20. In 2020/21, the average IHT bill stood at £214,000. Could your family face a substantial bill down the line?

Here’s why your wealth could incur an IHT liability that you may not be aware of, and how financial planning could help your family overcome it.

The Inheritance Tax nil-rate bands are frozen until 2028

Two factors that could contribute to your future IHT bill are the nil-rate bands. These bands mark how much wealth a person can pass down before IHT is due on their estate.

As of the 2023/24 tax year, and frozen until 2028, these nil-rate bands are:

• The £325,000 nil-rate band which applies to all assets, including property
• An additional £175,000 residence nil-rate band, available to those passing their main residence down to direct descendants (children or grandchildren).

Essentially, each individual may be able to leave a £500,000 inheritance IHT-free – or even £1 million if you and your spouse divide your assets evenly – if the estate includes family property worth at least £350,000. Beyond this amount, though, IHT is applied at a rate of 40% in most cases.

So, as your assets increase in value over the years and the nil-rate bands remain fixed, more and more of your estate may be pushed over these thresholds. If your estate is now on the cusp of being liable for IHT, by the time you pass away a significant portion of it could have been dragged into the taxable bracket.

Your home could form a large portion of your future Inheritance Tax liability

Across the UK, house prices have risen substantially overall in the past 20 years, despite short-term fluctuations.

Here in Yorkshire, this growth is particularly notable.

According to plumplot, the average price of a home in Yorkshire was just £106,000 in 2003 – but in 2023, this now stands at £218,000. With a more than 100% increase in just 20 years, it’s likely that your home’s value has risen substantially and may continue to do so.

While this could be welcome news if you’re planning to sell your home in the near future, anyone who wishes to leave a family property to the next generation when they pass away should be aware of how their home’s value could affect an IHT bill.

There are plenty of options to consider if you wish to reduce your IHT bill while still leaving a property to your loved ones. These might include:

• Reducing the value of your estate in other areas, such as your investment portfolio, over the course of your retirement. That way, your property wealth might make up the majority of what you own.
• Arranging Life Assurance which can provide a lump sum on your death to pay the IHT liability.

If you plan to use any of these options, it may be helpful to consult a Financial Planner before you proceed. We can help you assess your property wealth within your wider circumstances and come up with an expert-led plan for reducing your IHT liability.

Sharing your wealth with your loved ones now could prevent their Inheritance Tax bill from rising further

If you’ve been diligently saving and investing for the next generation all your life, nobody would tell you that you’ve “done something wrong”. Having a foundation of wealth to rely on later, and ultimately pass down to the next generation, is hugely important for many families.

Nevertheless, as you approach later life, it is important to take a new perspective on your growing wealth. If you know you have enough to live on comfortably until you pass away, it could be time to start thinking about how you plan to leave the rest as a legacy for your children.

While leaving everything in your will is a perfectly viable option, your children and grandchildren could pay IHT on the sum they inherit.

Understandably, you may wish to mitigate this possibility – and if so, you can explore “giving while living” options.

Once you feel confident that you have enough to support yourself through retirement, you could begin slowly giving funds to your beneficiaries to reduce your overall wealth before you pass away.

As of the 2023/24 tax year, every individual has an Annual Exemption of £3,000. This is the amount that you can give away tax-efficiently, split across as many recipients as you like. Over time, this sum could reduce the value of your estate and help your loved ones get ahead in life.

After 20 years, for example, you’ll have lowered your estate’s value by £60,000 – and your children and grandchildren will have received ample funds to pursue opportunities in their own lives.

Working with a Financial Planner can be instrumental in reducing your Inheritance Tax liability

The looming presence of a potential IHT bill could bring you anxiety in the coming years – but it doesn’t have to.

Despite the freezing of the nil-rate bands, you can still pass on a substantial £500,000 inheritance – or £1 million if your assets are divided between you and your spouse – without paying IHT. So, while it’s important to be aware of how an IHT bill could erode your legacy later, try not to panic.

Instead of worrying about this issue, it may be helpful to seek the support of a Financial Planner. We can:

• Assess the total value of your estate as it stands now, and use cashflow modelling software to predict how it might grow over time
• Draw up a financial plan that tells you how much you need to live comfortably in retirement, and factors in extra costs like later-life care
• Look at whether it might be helpful for you to reduce the value of your estate through financial gifts, and talk you through the benefits and risks of doing so.

For bespoke guidance surrounding IHT, contact us today.

Email enquiries@pen-life.co.uk, or call 01904 661140.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate planning, tax planning, cashflow planning, or will writing.

All contents are based on our understanding of HMRC legislation, which is subject to change.
All information is correct at the time of writing and is subject to change in the future.