Inheritance tax, abbreviated as IHT, is a levy imposed by certain governments on assets or estates passed from deceased individuals to their beneficiaries.
The government is generating record-breaking revenue from inheritance tax (IHT), as more families inadvertently find themselves liable for the so-called 'death tax'. In the 2024/25 tax year, IHT receipts amounted to £8.2 billion, surpassing the previous year's figure by £750 million due to rising property prices and asset values, as well as frozen thresholds.
IHT is a levy on the total value of an individual's assets that surpass a specific threshold, imposed upon their estate when they pass away. Asset types subject to this tax include property, possessions, savings, investments, and business assets. In addition, any gifts made within seven years of death may also be included in the taxable estate.
The latest data from HM Revenue & Customs has revealed that the IHT take for the most recent tax year represents the fourth consecutive annual record summit for this tax. In her maiden Budget in October 2024, Chancellor Rachel Reeves introduced modifications to the IHT regime, such as the subjecting of pension pots to the tax. Furthermore, the £325,000 tax-free allowance, known as the "nil-rate band," will remain frozen until 2030.
To comprehend IHT better, one must be familiar with the various thresholds, allowances, and exemptions that can help minimise the tax burden on estates. The current IHT threshold per person is £325,000, with the excess amount potentially subject to a 40% tax rate. Married or civil partners can leave any amount tax-free to each other, while a larger allowance is available if the deceased leaves their home to a direct descendant, such as a child or grandchild.
The introduction of IHT on pension pots, scheduled to take effect from April 2027, has raised concerns among some experts who view it as a potential 'blow for savers.' Pension pots are typically not counted as part of an estate, but changes to the rules could make them subject to IHT.
In most cases, the executor of the will or the administrator of the estate is responsible for paying IHT to HMRC. The tax must be paid within six months of the person's death, with interest charges accruing if not paid within this timeframe. Beneficiaries typically receive their inheritance only after the IHT has been paid and other debts or expenses settled.
Recent figures indicate that approximately one in 25 deaths in the UK results in an IHT liability. This proportion is expected to rise in the coming years due to the extension of the freeze on IHT thresholds and the upcoming changes to pension pots. Changes to non-resident and trust rules will also broaden the scope of taxable estates under UK IHT.
To potentially reduce one's IHT bill, individuals can consider making a will, donating to charity, leaving money in their pension, making lifetime gifts, taking out a life insurance policy, or investing in AIM shares. These strategies can help ensure assets are allocated according to one's wishes, while also minimising the tax burden on their estate upon their death.
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- Beginning in April 2027, pension pots may become subject to inheritance tax (IHT), potentially posing a challenge for savers looking to minimize their taxable estate.
- In addition to property, possessions, savings, and business assets, the taxable estate can also include any gifts made within seven years of death under the IHT regime.
- To minimize the IHT burden on an estate, one can consider various strategies such as making a will, donating to charity, leaving money in a pension, making lifetime gifts, taking out a life insurance policy, or investing in AIM shares.
