Alex Davies, Chief Executive of Wealth Club, reacts to today’s HMRC annual inheritance tax receipts and recommends ways to mitigate IHT liability:
“Revenue generated from inheritance tax last year amounted to £6.1 billion, this is a sharp increase of 14% on the previous year. We’ll have to wait a few years for the detail on how that number breaks down between increases in the number of taxable estates and larger tax bills, but it’s hard to imagine the average tax bill has shrunk.
The most recent numbers available, and published today, cover the 2019-20 tax year. They show a modest increase in the number of estates paying inheritance tax as well as a meaningful increase in the average inheritance tax bill, rising £7,000 to an average bill of £216,000. This is enough to buy the average house in Wales, or more than enough for the average home in Scotland or Northern Ireland.
Clearly more people are being dragged across the threshold for inheritance tax and the bills are getting bigger, which is a kick in the teeth for many families picking up the tab. The idea that you work hard, save hard and pay taxes all through your life only to see nearly half of what you have accumulated taken by the state can be unpalatable.
Inheritance tax rules are notoriously complicated, and even experienced investors can struggle to grasp them. But the good news is there are still a number of steps individuals can take to ensure they keep IHT bills to a minimum:
Give money away. Gifts taken out of regular income, which are not deemed to affect the giver’s standard of living, are inheritance tax free on day one – as are certain smaller gifts. You can give unlimited amounts away but typically these take 7 years to be completely inheritance tax free. Of course, once you give away the money you have lost control. If you need it back for an emergency, that’s not an option.
Invest in companies that qualify for Business Property Relief. These are typically inheritance tax free after 2 years. Investing in unquoted businesses can be risky, however, unlike giving the money away, you retain control.
Invest in forestry. Buy a forest outright or invest in a fund and after two years, this will typically be IHT free. In addition any income or gain in the value of the timber will be tax free.
Invest in an AIM ISA. ISAs are not inheritance tax free. When you pass away, 40% of your hard-earned cash could line the Government’s pockets instead of your loved ones. AIM ISAs are a popular way around this. They are riskier but after 2 years they could be IHT free.
And finally, whatever you do, make sure you make a will. If you don’t, the law will decide how your estate is distributed and it certainly won’t be the most tax efficient way.”