Will your estate be subject to Inheritance Tax? 5 influential factors to investigate

16 May 2024

Inheritance Tax (IHT) has come up in the news frequently in the last few years – and for good reason.

The IHT nil-rate bands, which represent the amount you can pass down to non-spousal beneficiaries without paying the tax, are frozen until 2028.

The nil-rate band stands at £325,000, as it has done since 2009. The residence nil-rate band, an additional tax break for those passing down their home to children or grandchildren, has remained at £175,000 since 2021.

Due to these freezes, more and more estates are being dragged into the taxable bracket – and as a result, HMRC’s IHT takings are increasing. Between April 2023 and March 2024, HMRC received £7.5 billion in IHT receipts – up £0.4 billion from the previous year.

Yet surprisingly, Canada Life research reveals that 25% of over-55s have no idea whether their estate will be liable for IHT.

With this in mind, continue reading to learn five factors that could contribute to your IHT liability.

1. Your properties

If you own one or multiple properties, these may make up a significant portion of your wealth.

So, if you are looking at calculating a potential IHT bill, it may be worth obtaining an up-to-date valuation on the properties you own.

As you read earlier, you can pass family property down to the next generations and benefit from the additional residence nil-rate band, meaning that you could bequeath £500,000 worth of assets tax-free.

However, it’s important to remember that the residence nil-rate band can’t be offset against buy-to-let and other commercial properties.

If you have a portfolio of properties, only those in which you had a “qualifying residential interest” at some point in your life can benefit from the residence nil-rate band.

2. Your investment portfolio

Unlike your pension, which does not usually count towards your estate for IHT purposes, your investments may count towards your IHT liability.

As such, it could be useful to:

• Work out how much your investment portfolio is worth today
• Look at its value in combination with other taxable assets like property
• Create a strategy for gradually disposing of invested assets over the course of your retirement.

Understanding how your investment portfolio may contribute to your family’s IHT bill might help you consider how best to divest your investments over the course of your lifetime. Plus, working with a financial planner may help you benefit from tax-efficient investing while keeping IHT in mind.

3. Any inheritance you have received

If you received an inheritance from a parent or other family member after they passed away, you may have immediately put this money away for a rainy day.

Alternatively, you could be planning to save some of this wealth and pass it down to your own children when the time comes.

While it is understandable that you’d want to savour your parents’ hard-earned money, passing down your own inheritance when you die could lead to this wealth being “double taxed”.

If part of your estate falls outside of the nil-rate bands, your inherited wealth could be subject to IHT. If you originally paid IHT on this money, it could be disappointing to learn that even more of it may end up with HMRC.

As such, it could be helpful to combine this inheritance with the value of your other assets to work out whether part or all of it could be subject to IHT, and use this information to inform your decisions over the coming years.

4. Your spouse’s wealth

It may be a difficult concept to think about, but it is likely that either you or your spouse will inherit the other’s wealth when one of you passes away.

Estates inherited by a spouse are not usually subject to IHT. But when the second person passes away, your combined estates may then be passed down to the next generation. As such, your estates may surpass the nil-rate bands and become liable for IHT at this point.

So, when you’re looking at your family’s potential future IHT bill, it may help to include your spouse’s wealth along with your own. This step might give you a more accurate picture of how much your loved ones could pay later on.

5. The value of your estate increasing over time

If you bought your home 10, 20, or even 30 years ago, it is more than likely that it has increased substantially in value since then.

For example, according to data published by the Office for National Statistics (ONS), the average UK house price in December 2009 was £168,082. In December 2023, the average UK home was worth £284,691.

But during this time, the nil-rate band of £325,000 has not increased in line with rising asset values.

This is just one example of how the value of your estate may have risen since you began accumulating wealth. And, it could continue to do so over the coming decades while tax breaks remain static.

Work with a financial planner to help you mitigate a future IHT bill

Working alongside a financial planner when conducting your estate plans may be of huge benefit to you and your family.

Firstly, we can use cashflow modelling software that projects how much your estate is worth today, versus how much it may be worth at the end of your life. This would give you a clearer idea of how much IHT your loved ones could pay when you pass away.

From there, we can begin to build a wealth strategy that involves offloading small portions of your wealth to the next generation on a gradual basis. This is called “giving while living” and may help you reduce the value of your estate tax-efficiently.

To learn about estate planning with the guidance of a seasoned professional, email info@depledgeswm.com or call 0161 8080200.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All contents are based on our understanding of HMRC legislation, which is subject to change.

Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

The Financial Conduct Authority does not regulate estate planning or tax advice.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.