IHT changes were rumoured for some time. A report from the Office of Tax Simplification (OTS) in July 2019 made several recommendations to reform the structure of IHT, in particular on the taxation of lifetime gifts and on exemptions for businesses. But in a delayed response on 30 November 2021, the Treasury announced that the government would not proceed with any major changes.
One OTS proposal has resulted in simplified reporting requirements for a larger proportion of low value and exempt estates, where no IHT is due. For deaths after 31 December 2021, the limits on assets held in trust, and on specified chargeable transfers in the seven years before death, below which full IHT accounts do not have to be delivered to HMRC, increased from £150,000 to £250,000. The changes will reduce the reporting requirements for 90% of non-taxpaying estates requiring probate or, in Scotland, confirmation.
Although 94% of estates pay no IHT, the amount the government raises from it is growing. This is partly because of the freezing of the nil rate bands, but also because of increasing property valuations and a higher volume of wealth transfers during the Covid-19 pandemic. The Treasury’s response revealed that IHT is forecast to raise Åí6 billion in 2021/22, up from £5.4 billion in 2020/21.
There are nevertheless ways you can mitigate your liability to IHT that need not involve any complex arrangements. Writing a will and reviewing it regularly not only enables you to optimise use of the IHT exemptions but also to ensure your beneficiaries benefit from your estate as you intend.
Complex family structures and changing personal relationships make this particularly important. For example, many people don’t know that partners who cohabit without marrying or entering into a civil partnership do not automatically benefit from the other’s estate under the intestacy rules, nor do stepchildren. And if you marry after making your will, it is automatically revoked and you will need to make a new one.
Another way of reducing tax on your estate is to make lifetime gifts. The accountancy firm UHY Hacker Young says that taxpayers saved £30 million in IHT last year through the £3,000 annual IHT gift exemption and the separate small gifts exemption, which allows people to make gifts of £250 a year to an unlimited number of individuals.
For deaths after 31 December 2021, the limits on assets held in trust, below which full IHT accounts do not have to be delivered to HMRC, increased to £250,000.
Taking measures to reduce exposure to IHT may not be enough. Research by the investment managers Fidelity International has found that 40% of people are delaying their retirement, spending less, or downsizing their property so that they can afford to pass on an inheritance. However, many of them have not made any financial plans about the best way to fund an inheritance, or indeed for meeting unexpected costs such as long-term care. Taking good advice at all stages in life is important to help you meet your goals.
