Will there be an inheritance tax grab?

The new Prime Minister has some impressive financial credentials, which the country may be in sore need of.

Back when he was Chancellor, he managed to simultaneously increase tax revenues while not increasing tax. But is he going to do so again, and will this mean an inheritance tax grab that could affect you?

Stealth taxes cost you real money

The post covid financial black hole was – and still is – a major problem for the government. There is a shortfall of around £55bn between what the government estimates it needs to pay out and what HMRC receives from taxpayers.

As Chancellor, Rishi Sunak was able to keep the governments promise of not increasing tax while increasing tax revenue by freezing tax thresholds. This is a stealth tax increase – tax thresholds are usually increased each year to keep pace with inflation. With inflation running at over 11%, the result is much more income for the government as prices, and to a lesser extent incomes, rise.

Fiscal drag – keeping tax concessions the same despite inflation – means an outright tax rise is avoided, reducing the risk of backlash from future voters while substantially increasing tax revenues as inflation and earnings growth push more taxpayers into higher tax brackets.

The tax threshold freeze applied to most taxes with many thresholds and allowances frozen until 2026. But there is speculation that the freeze may be extended as the most palatable way for the Chancellor to raise the extra revenue he needs.

There could be a particular impact for the future of those you leave behind through inheritance tax – or IHT.

Inheritance tax and your money

The nil rate band – the amount that can be passed on before IHT is due on an estate – has been stuck at £325,000 since April 2009.

 Families currently have to pay 40% inheritance tax on the value of an estate above £325,000. Thousands of families are already caught by the combination of high property prices and frozen IHT allowances. If the freeze is extended, the average IHT bill will soar from £216,000 back in 2019-20 to £297,793 in 2025-26 and then again to £336,605 for 2027-28.

This will see grieving families pay collectively £1bn extra in IHT in 2026-27 and 2027-28, 

Historically IHT was a tax of the very wealthy. Now, with house prices heading upwards it has become a tax affecting almost anyone who owns their own home. 

What can you do to avoid the inheritance tax grab?

The one good thing that can be said about Inheritance Tax is that we are never around to pay it. However, it can make a very big impact on those we leave behind.

If you want to reduce the impact of Inheritance Tax and help ensure that more of your wealth goes to your loved ones than to the taxman, you need to act. 

There are several ways to help preserve your wealth for your beneficiaries.

  • Gifting. Giving some of your wealth to your beneficiaries while you are still alive can mitigate inheritance tax on your death. Potentially Exempt Transfers (PETs) allow you to give money and property away as long as you live for seven years after making them.
  • Insuring against the inevitable. If set up in the correct way, taking out a whole of life insurance policy could provide a large sum payable on your death which your executors can use to cover your IHT liability. 
  • Setting up a trust. Putting your cash, property or investments into a trust so someone else can look after them while you are alive can allow them to be passed on without tax issues when you die. 

These are only some of the possible solutions, and a comprehensive approach to succession planning may be vital if your wealth is to go where you actually want it to.

The important thing to understand is that you need to act – and that it is never too early to do so.

 At Continuum we can work with you to develop the succession plan you and your family need – avoid the inheritance tax grab.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable Protection products or investment strategy, you should seek independent financial advice before embarking on any course of action.

The value of investments can fall as well as rise and you may get back less than you invested.

The Financial Conduct Authority does not regulate estate planning wills, tax and trust advice.




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