Once a problem faced only by the wealthiest landowners, inheritance tax (IHT) now hits more people than ever before. The number of estates incurring the charge has almost doubled in the past 10 years, from 15,000 to 27,000 – and that number is set to keep growing. Thankfully, there are plenty of things that can be done to mitigate how much you’ll have to pay. We spoke to Faye Church, senior financial planning director at Investec Wealth & Investment (UK), who explains more.

How do I know if I’ll have to pay IHT?

The short answer is that for married couples who own a property, IHT is usually due if their estate is worth more than £1m. Dig a little deeper and it’s more complicated. There is a £325,000 nil-rate band available to everyone, and an additional £175,000 residence nil-rate band is available to those who own a property and leave it to direct descendants, though this is reduced if the total estate is above £1m (£2m for a couple).

There’s no IHT to pay between spouses, and a spouse also passes on their IHT nil-rate allowance to their widow or widower (it’s one of the few tax breaks remaining for married couples). So, a couple with a property could have £1m of their estate fall under the IHT threshold, providing certain conditions are met.

Why are so many more people liable to pay IHT these days?

Quite simply because IHT allowances haven’t kept up with inflation. The £325,000 nil-rate band has been frozen since April 2009; if it had risen with the cost of living, the Bank of England says it would now be £495,550. Inflation is just a part of the picture, however: the biggest asset within most people’s estate is their property, and property prices since 2009 have risen even more than other costs. A couple who owned a property worth £600,000 or more in 2009 will now more than likely be over the £1m IHT threshold.

Does everything I own count towards the size of my estate for IHT purposes?

Most assets do fall within IHT – but there are exceptions. Gifting is the most common example: gifts given to friends or family are exempt from IHT as long as the donor survives for seven years – or two years for any assets that qualify for business relief. 

Gifting within their lifetime is something we see a lot with clients who have the capacity to do so. There are rules allowing a £3,000 annual gift exemption, small gifts of £250, marriage gifts and more. 

The usual thing we see is parents and grandparents helping their family get a foot on the property ladder. For those who want to save on IHT but do not want to relinquish control of their assets, they can do so via gifting into trust or using investments that attract business relief. This way, the client retains control of who can benefit and when.

What else should I know about gifting during my lifetime?

Be ready to face a few awkward conversations: talking about what happens after the end of our lives is not the stuff of dinner-party conversation, and children in particular can find it difficult to discuss these things with their parents. Time and again we hear of the next generation telling their mothers and fathers to “just spend it” rather than worrying about IHT planning.

But as you get older, it does make sense to involve your children in any discussion around inheritances and IHT to ensure that any complex plans put in place are understood by the family. That way, when the time comes, everyone will know where they stand.

If you have watched Succession, you probably associate trusts as something only for the wealthiest of families. Can they make sense for people with more modest levels of wealth?

Trusts don’t have to just be for the rich, and they also don’t have to be expensive to set up. We have a number of clients who use trusts as a way of retaining some control of their assets in their lifetime while still keeping them out of their estate for IHT planning. It’s important to realise, however, that anything kept in trust is no longer yours to do with as you wish: think of it as retaining an influence on how the assets are managed and who they benefit.

What’s the first step I need to take?

If you don’t already have one, ensure you make a will – if you don’t, your estate will follow the strict and inflexible rules of intestacy. But once that’s done, take professional IHT advice because these are complex matters with large sums involved. When clients come to us, we’ll assess their IHT liability and work with them to find out what’s important to them, to what extent they wish to mitigate any IHT due, and help them with cash-flow planning to quantify whether gifts are affordable. Once that’s done, we can then advise on the most appropriate solutions to obtain the best outcome for all concerned – and we’re always happy to review the plan on a regular basis, since we know that life can change.

To find out more, call Investec Wealth & Investment (UK) on 0808 164 123 for a confidential, no-obligation chat or visit: investecwin.com

*Gov.uk – Inheritance Tax statistics: commentary 2023

**Nationwide House Price Index figures

The contents of this article do not constitute a personal recommendation or advice. It is important to consult a professional adviser before taking any action. Tax treatment depends on the individual circumstances of each client and may be subject to change in future. All statements concerning tax treatment are based upon our understanding of current tax law and HMRC practice and can be subject to change.