‘Woeful’ – Inheritance tax threshold would be £460k if it increased in line with inflation

Inheritance tax: Financial advisor provides advice

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The nil rate band has been frozen for a total of 17 years. It remains at the amount it was in 2009, and will stay frozen until 2026. The band is next up for review at this point, by which time analysis suggests it could have been around £500,000 if increased in line with inflation.

However, because it lags behind, more people are being drawn into the tax net as incomes and property prices increase. 

Andrew Tully, technical director at Canada Life, said: “The nil rate band for inheritance tax has been frozen for more than a decade and as a result is woefully lagging behind inflation. 

“While IHT has historically been a tax of the very wealthy this is clearly no longer the case. 

“With property prices soaring and most personal tax allowances including the standard and residence nil rate band frozen until April 2026, this is now a concern for larger sections of society as the IHT tax net widens.”

In 2009/10, IHT receipts were recorded at £2.38billion, however, in just 12 years the landscape has vastly changed.

HMRC statistics released this week have shown a jump to £6.1billion in the 2021/22 tax year.

This is an increase of 14 percent on the previous year, and the largest single-year rise in IHT receipts since 2015/16. 

Mr Tully also drew attention to predictions recently made by the Office for Budget Responsibility (OBR).

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The OBR states the tax take from IHT is expected to grow to a staggering £8.3billion by 2026 as the taxman continues to rake it in.

It means even more people than ever before will be forced to confront what inheritance tax could mean for them.

Mr Tully continued: “This year’s surge in income will partly be driven by the ongoing increase in house prices, as residential property makes up the largest share of most estates. 

“There has also been a higher volume of wealth transfers due to COVID-19.

“This is partly due to more deaths in the elderly population, but also as some people make outright gifts to help family during this difficult period.”

However, there are ways for Britons to mitigate their inheritance tax bill according to the expert.

The important issue is to plan ahead as only this will help individuals to legally avoid potential liabilities.

Mr Tully looked towards actions such as setting up a trust, making use of gift allowances or gifting to charity.

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However, he also added: “Pensions are also normally excluded from your estate for IHT purposes. 

“You can potentially pass on your pension in a tax-efficient way so take this into account when deciding which assets you use to provide an income in later life.”

The most important action to take, Mr Tully concluded, is to speak to experts.

Independent and regulated financial advisors are likely to be able to understand specific circumstances and make the most appropriate, and tailored, recommendations on next steps. 

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