It seems that before almost every Spring Budget and Autumn Statement, there are calls for Inheritance Tax (IHT) to be abolished.

IHT is a 40 per cent tax on the estates of deceased individuals which must be paid during the probate process and before their beneficiaries receive any assets promised to them.

However, despite some more general tax changes made by the Chancellor in this year’s Spring Budget (8 March 2024), IHT lives to fight another day.

There are ways to mitigate against IHT and some estates are not required to pay it whatsoever (more on this below).

We often find ourselves advising clients, whose estates have strayed just over the threshold, on strategies to reduce their IHT liabilities and wanted to provide a bit more context on this complicated issue.

Who has to pay IHT?

IHT is applicable to estates that are valued above the £325,000 tax-free threshold – but it’s not quite that simple.

You can increase this threshold by using your Residence Nil-rate Band (RNRB).

This can allow you to claim up to an additional £175,000 in connection with your main residence on top of your personal allowance giving a potential tax-free allowance in total of £500,000.

However, the rules can be complex, and you should seek advice as to how this applies to your own estate.

Furthermore, if you pass on the entirety of your estate to your spouse, not only does IHT not apply, but they also inherit your unused allowances.

Combining yours and theirs means that, between you, you could pass down £1 million free of IHT.

(£325,000 + £175,000 = £500,000) + (£325,000 + £175,000 = £500,000) = £1 million.

IHT is then charged on the value of your estate that sits above this threshold (not on the entire estate).

So, with an estate valued at £1.1 million, the 40 per cent tax would come from the £100,000 and the remaining £1 million would be tax-free.

How to reduce your IHT liability

Apart from increasing your tax-free threshold (above), there are a few ways to reduce your overall IHT liabilities.

The first is gifting, which allows you to pass down some of your estate before you die.

You must do this seven years before you die (or more) to ensure that the gifts are not subject to IHT. This is called the ‘seven-year rule.’

Gifts can include money, property, antiques and household goods, stocks and shares, and other valuable items like jewellery.

You can give away any amount to multiple people or just to one individual and the first £3,000 worth of gifts each tax year is exempt from IHT.

There are more complex rules that apply to weddings, birthdays, and Christmas gifts so it’s best to discuss gift-giving with your solicitor.

(Gifts given to someone you are legally married to are unaffected by IHT and can be of any value).

Trusts are also a common way to reduce your tax liabilities and we often advise clients on setting up and running a trust, but this can be a complex area.

Choosing the right type of trust depends on your specific circumstances and objectives, so it’s important to seek professional advice to navigate these complex rules and maximise your estate’s benefits.

It’s also possible to reduce the rate at which IHT is charged on the value above your tax-free threshold by including a charity in your Will.

If you leave more than 10 per cent of your estate to charity the IHT rate is reduced from 40 per cent to only 36 per cent.

It’s also a great way to make a powerful philanthropic gesture and leave a lasting legacy.

Will IHT be abolished any time soon?

The idea that IHT was going to be ended in the recent Spring Budget has obviously not come to fruition and it seems unlikely that there will be another budget announcement before the next general election.

As such, it falls to the next ruling party to decide whether IHT is going to continue.

Earlier this year, the leader of the opposition, Sir Keir Starmer, said he was “fundamentally opposed” to abolishing (or even reducing) the IHT tax.

And the Conservatives have not made significant moves to end the tax either – despite growing calls to do so.

As you can see, it’s likely that IHT is here to stay so it’s best to plan with this outcome in mind.

You should look to structure your assets and write your Will in such a way that your beneficiaries are not burdened by IHT when you pass away.

We can help you with this and as solicitors specialising in Wills and Probate, we can give you guidance on every aspect of estate planning.

Please reach out to one of our team or call your nearest Ansons office in Cannock, Lichfield and Sutton Coldfield for more information.