The Garrulous Jay – Legacy Issue

Publish date


Recently published monthly statistics from HMRC chart the continuing rise in Inheritance Tax (IHT) receipts. In the year to the end of October receipts totalled £4.1 billion, up 14% on the same figure 12 months ago. With the IHT-free thresholds now frozen until 2028 the OBR forecasts receipts to rise to £7.8 billion in 2027-28. This should be a cause for concern.

The so-called Nil Rand Band (NRB) of an individual’s estate which is not subject to IHT has already been frozen since April 2009. Notwithstanding the benign inflationary environment that’s prevailed for much of that time, had the NRB gone up to match CPI it would now be about £454,000. That’s 40% above the level at which it’s frozen.

For many individuals the absence of any increase has been mitigated by the introduction of the Main Residence Nil Rate Band. Introduced in 2017, this gives an induvial an additional £175,000 of IHT-free allowance if they leave their home to their direct descendants, but it starts to get whittled away if an estate has a total value over £2 million.

In the short-term one might argue that there is little to worry about. The current inflationary effects apply largely to goods and services rather than assets (such as property) and this will therefore limit the rate at which estates increase in value and fall prey to the freeze in the IHT-free thresholds.

But that should come as cold comfort as it would imply a moribund economy and markets for the next six years, which takes us well beyond the next General Election. Talking of which, there may also be a political dimension to this too.

A future Labour Government might be more inclined to tax assets more heavily, ahead of income. One can see how a reluctance to maintain the tax squeeze on “hardworking people” might be offset by additional taxation of those “lucky enough” to have inherited significant wealth.

The careful consideration of how a potential IHT liability might be mitigated should therefore be central many people’s financial plans.

Any such planning should begin with the obvious: quantification. The IHT-free thresholds may look large, with the estate of a couple who leave everything to each other on first death benefiting from up to £1 million in nil rate bands. Set against this, research published by Savills earlier this year estimated there are already 689,189 homes in the UK worth more than this.

Only once one knows the size of the ‘problem’ can one consider what steps it might be appropriate to take to mitigate it. This is a complex area that might involve gifting, investing or insuring against the liability.

What is clear is that, with the tax-free thresholds going nowhere fast, doing nothing may see people sleepwalking into an Inheritance Tax problem they scarcely even knew they had.