Earlier this year, Chancellor Rishi Sunak made his budget announcement with a somewhat mixed amount of news for savers and savers
no major differences were reported to the tax system. However, changes or lack of such included a freeze on the inheritance tax (IHT) limit, which is set to remain in effect for the next five years.
While this may not seem like a measure that deserves immediate attention, without proper financial planning and considering the impact of the freeze, there is a risk that people will exceed allowances in the next few years.
In July 2021 alone, £ 570 million was paid in IHT, the highest amount in a single month since HM Revenue and Customs began keeping records.
This was partly due to an increase in IHT property after a year of record rises in house prices and the sustained rebound in equity markets. Coupled with the freeze, taxpayers may face record bills in the years to come that could catch up with them.
In line with the trend, a record £ 2 billion estate tax was paid between April and July 2021, according to data released last month1.
The impact of Covid-19 remains to be seen, and HMRC said it was too early to say whether the pandemic resulted in families making additional wealth transfers over the past year.
The latest figures released for the 2018/19 tax year showed 1,190 people in Scotland contributed to a total income tax bill totaling £ 233 million – an average of £ 195,798.32 each.
Across the UK, the average payment increased 6 percent year over year, and that pattern could continue.
Two IHT allowances are now frozen until the start of the 2026 tax year: the £ 325,000 zero rate – which was set in April 2009; and the zero resident rate of £ 175,000. While these allowances appear generous, any significant or even moderate increase in the value of an estate could cause problems without families noticing.
For example, an estate currently valued at £ 750,000 – which would not exceed the zero rate for a married couple – could realistically grow to £ 957,000 over the next five years, based on a 5% annual growth rate.
Planning ahead will be key to managing future IHT liabilities. If you think there might be a problem with your estate, first get an overview and seek professional advice from a financial planning team and tax specialist.
There are a number of options and actions that should be considered as part of a financial plan, but what the best path forward might be will depend on individual circumstances.
However, assessing your potential future growth will help you first get an overview of your current situation.
Depending on the risk profile of your investments, you can use a benchmark number as an estimate and, for real estate investments, look at recent sales of similar properties in the same neighborhood or request a formal valuation.
It’s important to remember that this estimate is used as a guide only – real estate markets and stock prices can be volatile and unpredictable. We’ve seen that firsthand over the past 18 months.
Along with a financial planner, you can choose to go the free gift route, invest in specific products that provide relief, create a trust, alternative investments, or simply ensure that you are maximizing all annual exemptions.
However, there are different risk profiles to consider and these options may not be suitable for all.
The most important thing is to talk about IHT while having the opportunity to come up with a plan and then review your situation annually from then on. Legislation could still change, but based on the current lockdown schedule, there is a risk that your family could face a significant unexpected bill.
IHT cannot affect you now, but it could become a serious factor in the future if forgotten.
Daniel Hough is a financial planner at Brewin Dolphin.