After the UK government’s tax authority released its inheritance tax receipts for the period April to December 2023 – showing another rise on the previous year’s levels, and with the IHT threshold being frozen until 2028 – wealth managers look at what can be done to mitigate the impact.

Wealth advisors have been making suggestions on how clients can ease the pain from inheritance tax after latest figures from the UK’s tax authority HMRC show that IHT tax receipts hit £5.7 billion ($7.24 billion) from April to December 2023, up £400 million from the same period last year, continuing the upward trend over the last decade.

The government’s inheritance tax take is increasing largely due to years of house price rises, high inflation, and tax freezes which have pushed an increasing number of families, who would not see themselves as wealthy, above the threshold for inheritance tax.

Inheritance tax is typically paid at a rate of 40 per cent over certain thresholds; money can be passed on IHT-free to a spouse or civil partner, who will then also inherit the allowance when they die.

In the UK and in countries such as the US – both nations are in election years – inheritance/estate taxes are important political as well as financial battlegrounds. Defenders of the existing system say they generate important revenue for public coffers and help reduce inequalities aggravated by a decade of ultra-low interest rates and rising asset prices. Critics say such taxes are a burden when people have already paid taxes during their lives, can break up businesses and estates, can be cruel in terms of their timing and impact, and discourage family wealth formation.

IHT threshold
The main threshold – the nil-rate band – applies to the vast majority of people in the UK, enabling up to £325,000 of an estate to be passed on without having to pay any IHT. There is also a residence nil rate band worth £175,000 which allows most people to pass on a family home more tax efficiently to direct descendants. However, this tapers for estates worth over £2 million and is unavailable for estates worth over £2.35 million. 

PAYE income tax and National Insurance receipts from April to December 2023 also increased reaching £294.5 billion, according to HMRC’s figures.

“Rumours are swirling that a more significant cut to income tax or another NI cut is in the offing as the government tries to woo voters as we head into this election year. This change may cause tax revenues to drop more significantly if it does come to fruition,” Shaun Moore, tax and financial planning expert at Quilter, said.

Despite pressure to cut or even remove the controversial inheritance tax in last year’s Autumn Statement, it was not included. “As an IHT cut would have little immediate impact on households’ financial situation, it’s perhaps more likely that a pledge on inheritance tax will feature in the Conservative manifesto rather than in the budget – particularly as it might appeal to and motivate some of the party’s core voting demographic,” Laura Hayward, tax partner at professional services and wealth management firm Evelyn Partners, said.

“Abolition of IHT would certainly split voters and it’s likely that Labour would fairly rapidly vow to bring it back into force if they were to get in. This could therefore become a serious area of contention over the following few months if the Conservative party is minded to push ahead with abolition. Regardless of which political party gets into government, simplification of IHT is certainly overdue,” Moore added.

For those who are picking up the death duties, calculations from Wealth Club, another firm, suggest that the average bill could increase to £239,000 this 2023/24 tax year, with over 30,000 families having to hand over part of their inheritance to the taxman. This is an 11.5 per cent increase from the £214,000 average paid just three years ago and a 14.4 per cent rise in the number of estates paying the tax. 

With IHT being one of the most important taxes that a high net worth individual is likely to contend with, Wealth Club looks at what can be done to mitigate IHT liability:

1) For those who don’t expect to need their savings in the near term, and who are prepared to take more risk, investing in early-stage businesses through the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Schem (SEIS) might be worth considering. Not only are they very tax efficient, including being free of IHT after two years, but your money goes to fund entrepreneurial companies, which is great for economic growth and job creation.

2) 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. Timing is key as you can give unlimited amounts away but typically these take seven years to be completely inheritance tax free. Of course, once you give away the money you’ve lost control. If you need it back for an emergency, that’s not an option.

3) Investing in companies that qualify for business relief. These are typically inheritance tax free after two years. Investing in unquoted businesses can be risky, however, unlike giving the money away, you retain control.

4) Investing in an AIM ISA. ISAs are not inheritance tax free. When you pass away, your loved ones could miss out on 40 per cent of your hard-earned cash. AIM ISAs are a popular way around this. They are riskier but after two years they could be IHT free.

Wills
Jonathan Halberda, specialist financial advisor at Wesleyan Financial Services also highlighted how making a will – whether leaving assets to a spouse or civil partner or distributing assets to take advantage of tax-free allowances – can help reduce or avoid inheritance tax altogether.

“Using trusts – assets in trusts are no longer in your name and therefore not considered when valuing your estate for inheritance tax,” he said. “Leaving gifts to registered UK charities in your will, whether it's money, property or other assets, is exempt from inheritance tax,” he added.