The Sunday Times recently reported that the Prime Minister, Rishi Sunak, has been looking to propose cuts to Inheritance Tax ahead of the next general election.
However, speaking to the BBC on Sunday 1st October 2023, the Prime Minister declined to commit on any such tax cut. Other governmental sources have suggested that there are no set plans in place for an Inheritance Tax cut, or how this would look in practice. The Chancellor, Jeremy Hunt, has also previously insisted that tax cuts are unlikely in the face of current public finances.
As such, in the face of speculation over cuts to Inheritance Tax, it is important that you look into the current regime when undertaking estate planning.
Under the current regime, Inheritance Tax is potentially chargeable on four occasions:
- On the death of an individual
- When an individual settles assets into certain types of trust during their lifetime
- When assets are transferred out of certain types of trust; and
- At 10 yearly intervals within certain types of trust
When an individual dies, Inheritance Tax is usually charged at a rate of 40% against their total estate, i.e. the total balance of their assets less any debts and funeral expenses. Each individual has a tax free allowance called their Nil Rate Band, which means that the first £325,000 of their estate is subject to tax at a nil rate. If they have a main residential property that they own and live in and intend to leave this to their direct descendants, providing their estate is valued at no more than £2 million, then they should be entitled to a further £175,000 tax relief called the Residence Nil Rate Band.
Married couples can share their tax allowances on the death of the second spouse, presuming that the first spouse did not need to use all of their own allowance on their death. This potentially allows up to £1,000,000 in tax free allowances for home-owning married couples with children.
Additionally, it is tempting to consider Inheritance Tax as a tax for the wealthy, especially as the Treasury’s figures for 2020/21 suggest that only 3.73% of estates actually pay any Inheritance Tax. However, in that same tax year, nearly 5,000 estates that were worth between £325,000 to £500,000 paid Inheritance Tax, accounting for 18% of all estates on which Inheritance Tax was due, according to the Institute for Fiscal Studies.
Whether you are fortunate to have significant personal wealth, or if your estate is more modest, you should look to structure your estate planning to take into account the current Inheritance Tax regime regardless of if cuts are implemented.
Next Steps for planning your estate
Planning your estate can be a complex undertaking, particularly where there is any risk of your estate being liable to pay Inheritance Tax. You should always consider obtaining professional advice to ensure that your wishes for how you intend your estate to pass on your death are planned correctly.
If you are considering preparing a Will require assistance with estate planning or have any questions, please do not hesitate to contact our Wills, Trusts & Estates Department, Heather Lally or Stephen Mackellar on 01244 354800 or email: Heather.Lally@dtmlegal.com or Stephen.Mackellar@dtmlegal.com.
This article is not intended to be comprehensive or to provide specific legal advice. It should not be relied upon in the absence of specific advice given in relation to particular circumstances.
