The Government earned £4.8 billion in inheritance tax (IHT) receipts between April and November 2022, according to the most recent figuresThis represents a £600 million increase on the same period a year earlier and sets another record in the upward trend for the tax.

Inheritance Tax (IHT) is by no means the biggest earner for the Government – of the £490.8 billion it took in tax between April and November 2022, Income Tax and National Insurance Contributions accounted for £251.4 billion combined. However, the tax has risen steadily for over a decade and is becoming an increasing issue for many middle-class families.

Who pays IHT and why is the Government attracting more money?

Inheritance Tax (IHT) receipts have risen significantly in the past 10 years, chiefly because the Government has frozen the threshold at which families become liable to pay the tax for consecutive years. The current threshold of £325,000 has been in place since April 2009. As asset prices for wealth such as property and investments have grown, more and more estates have been pushed over the line. With the average property price standing at £296,000 in October 2022, it doesn’t take much to reach that threshold if you’re a homeowner. Chancellor Jeremy Hunt committed to keeping this threshold in place until at least 2028, meaning this trend is only set to continue.

How to mitigate IHT liability

Inheritance Tax (IHT) comes with a series of rules and extra thresholds that makes liability for paying the tax more complicated than the simple £325,000 level, however. Married couples benefit from a transferable nil rate band. This means the combined wealth of a married couple can reach £650,000 before becoming liable.

Estates which contain a main residence property also enjoy a residence nil rate band. This means the primary family home enjoys a residence nil rate band of £175,000. If a married couple combines this, the total estate can be valued up to £1 million before incurring IHT liabilities, assuming they own a home.

Pensions are also free from IHT liability, but this only applies to lump sums that are a discretionary payment from the pension provider.  This does not apply for specific products such as annuities where the estate is entitled to a guaranteed payment.

Inheritance Tax (IHT) also contains exemptions when it comes to gifting. The seven-year rule stipulates that any wealth given away to others is tax free, assuming the person who is giving away money survives for seven years after it is given. There are also annual gifts that can be given tax free. Gifts of up to £3,000 can be made each tax year without incurring any liability, while a wedding gift allowance of £5,000 is also applicable for parents. Grandparents or great grandparents can gift £2,500 towards a wedding.

The exemptions don’t end there – business owner exemptions, putting assets into a trust, and certain investments also carry tax breaks with regards to IHT. However, such methods are best discussed with a financial adviser in order to ensure that IHT liability mitigation is being done in the right way.

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All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 12th January 2023.