More estates to become liable for inheritance tax

The amount of inheritance tax (IHT) paid to the government is increasing, and is set to rise further as the thresholds remain frozen.

Between April and November 2022, HM Revenue and Customs (HMRC) collected £4.8bn in inheritance tax receipts -- up £600m compared to the same period a year earlier, FT Advisor reports.

The freeze on IHT thresholds for the next five years is expected to net an additional £1bn for the government, according to forecasts by the Office for Budget Responsibility.

"With thresholds frozen until at least April 2028, more estates will be coming in from the cold and will likely be caught in this widening tax net, and this is despite predicted house price falls in 2023," said Andrew Tully, technical director at Canada Life.

Financial advisers can help by discussing estate planning solutions with clients and their families.

"Engaging early with good planning can help to reduce or mitigate IHT so it's essential anyone who considers IHT to be an issue should be seeking expert advice now," Tully said.

Housing wealth

An HMRC Freedom of Information (FOI) request from retirement specialist Just Group revealed that in 2019-20, the latest financial year of available data, property represented half the wealth of estates in London paying IHT, with an average value of over £820,000.

The proportion of housing wealth in IHT-paying estates was 39% in the South East, at £604,000, 36% in the East of England (£524,000), 32% in the South West (£474,000) and 31% in the West Midlands (£398,000). It was a quarter or less in all other regions.

Stephen Lowe, group communications director at Just Group, noted that house prices rose significantly during the pandemic, with homeowners over the age of 55 benefiting from £1bn of property value growth every single day between March 2020 and June 2022.

"This is likely to have tipped many more estates over the IHT threshold, perhaps without the homeowners even realising. It is another reminder of why it is so important that people regularly assess the value of their estate, including an up-to-date valuation of their property."

IHT interest rate rises

For those already facing an IHT bill, HMRC has raised the interest rate it charges on overdue payments.

From 6 January 2023 the interest rate is 6%, up from 5.5% between November 2022 and January 2023 and more than double the rate of 2.75% a year ago.

This year could bring further increases in the rate, according to Andrew Tully from Canada Life.

Amongst those affected by IHT interest rate changes are beneficiaries who opt to pay an IHT bill in annual instalments over 10 years, for example in cases where IHT is due on assets which may take time to sell, such as the family home.

"This allows the family to keep the asset and pay the tax due gradually," Tully explained. "However, the big increase in interest rates will make this a less attractive option.

"IHT is a complex area so people affected should take expert financial advice which will help work out the best outcome for their particular circumstances."