Inheritance tax and how it affects your clients

Once considered as a tax only the wealthiest families would face, every year inheritance tax (IHT) leaves thousands of grieving families with a large tax bill to pay. And the number of families caught in the IHT trap is increasing. Earlier this year the Office for Budget Responsibility (OBR) announced it expects IHT to raise £7.2 billion in the tax year 2023-24, and by 2027-2028 that figure will rise to £8.4 billion.[1]

One of the reasons for this increase is that the nil-rate band – the amount every estate can pass on to beneficiaries without being charged IHT – has been frozen for well over a decade. Between 2000 and 2009, the nil-rate band was raised annually, increasing from £234,000 to £325,000. However, it has been stuck at £325,000 ever since, and it is not due to be reviewed again until April 2028.

And as well as putting the UK into a cost-of-living crisis, inflation is also causing more families to face an IHT liability. Several decades of rising house prices have also meant more of the UK population have an estate valued well above the nil-rate band.

In June, former chancellor George Osborne suggested IHT thresholds should be rising with inflation to prevent more families being caught in the IHT net.[2] According to PwC, if the nil-rate band had risen in line with inflation since 2009, the IHT threshold would now be well over £478,000.[3]

Moreover, the residence nil-rate band, which was introduced in 2017, hasn’t proved as successful as initially anticipated. This allowance offers an additional £175,000 of IHT relief but can only be claimed by estates where the deceased leaves their ‘family home’ to their ‘direct descendants’, meaning their children, step-children or grandchildren.

Also, the amount of IHT relief that can be claimed through the residence nil rate band reduces proportionately where the estate is valued at more than £2 million, and is reduced to zero if the estate has a value more than £2,350,000. There have also been media reports of cases where families have not been able to claim the allowance because of the use of discretionary trusts.[4]

In other words, the number of estates that are large enough to trigger an IHT liability but small enough to claim the residence nil-rate band is limited; it doesn’t really solve the problem it was designed to – take more families out of paying IHT completely.

So, with more estates likely to be facing a future IHT bill, what can financial advisers be doing right now? Well, even if you’ve previously ruled out some of your clients from needing estate planning it might be worth revisiting their finances in light of the high inflation environment, to see whether they are now caught in the IHT net.

If so, they may be interested to hear about a range of different estate planning strategies designed to suit their circumstances, and to be given advice on how they can make plans for their families without falling foul of HMRC rules.

In many cases, it will be worth having a conversation with those clients who haven’t yet given estate planning much thought, and encourage them to put it onto their agenda before it is too late.

IHT will continue to be both a political football and source of contention in the financial press, but financial advisers will be doing their clients a great service by bringing the topic to their attention, especially those who haven’t yet appreciated the impact it could have on their family wealth.

[1] Office for Budget Responsibility (updated April 2023).

[2] https://www.telegraph.co.uk/politics/2023/06/09/george-osborne-inheritance-tax-thresholds-inflation/

[3] https://www.express.co.uk/finance/personalfinance/1594250/inheritance-tax-iht-low-income-threshold-tax-allowance

[4] https://www.telegraph.co.uk/money/consumer-affairs/will-family-lose-175k-tax-break-inheritance-money-goes-trust/