Inheritance tax trap may be sprung by Rishi Sunak this week

Inheritance tax: Expert provides tips on avoiding hefty bill

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Although not officially confirmed yet, experts have suggested Chancellor Jeremy Hunt is expected to extend a freeze on the inheritance tax threshold for another two years on Thursday. The inheritance tax allowance has been frozen at £325,000 since 2009 and in the current Prime Minister and former Chancellor Rishi Sunak’s Spring Statement in 2021 he froze the allowance again until 2026.

If the Chancellor extends the allowance again, a tax which was originally meant only to impact the wealthy will likely hit more middle-earning households in the coming years.

Commenting on the reports, Stevie Heafford, partner at accountancy firm HW Fisher said: “There are challenges for all of us ahead, Government debt is close to £2.4trillion and to truly tackle this, tax increases look inevitable as the Government seeks to rebalance the books.

“If the Chancellor decides to keep the threshold fixed for inheritance tax, rather than rise it in line with inflation, more people are going to find themselves caught in the inheritance tax trap.”

In the UK, inheritance tax is paid on an estate, the property, money and possessions, which is worth over the £325,000 allowance of someone who has died.

Anything above the current threshold is taxed at a rate of 40 percent and if the estate’s value is below the threshold then a person does not have to pay any inheritance tax whatsoever.

The HM Treasury raked in a record amount in inheritance tax in the first half of this tax year.

According to figures from HM Revenue and Customs (HMRC), inheritance tax receipts hit a record £3.5billion for the first half of the 2022-2023 tax year.

This overtook the previous high of £3.1billion collected in the same period last year.

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The reason cited for the increase in inheritance tax takings is rising inflation and soaring house prices.

The average price of a house in the UK has almost doubled since the nil-rate band was frozen, from just over £150,000 to almost £300,000 today, according to the UK House Price Index.

When passing on property, people can benefit from the Residence Nil Rate Band (RNRB).

This is an additional IHT-free amount that was first introduced in 2017 and the primary purpose was to allow people to pass on their home to family free from the tax.

However, certain conditions must be met to be entitled to the addition.

Under the current rules, there is no tax to pay if an individual passes a home to their husband, wife or civil partner when they die.

The Residence Nil Rate Band comes into play if someone passes on the house to direct descendants such as children or grandchildren.

Children who are adopted or fostered are also eligible for the criteria.

If an estate and the deceased meet all of the qualifying conditions for the relief, their total inheritance tax relief could be £500,000.

Ms Heafford added: “For many people, their home is their most valuable asset.

“It means that if certain conditions are met, those who are left a gross estate worth less than £2million will qualify for Residence Nil Rate Band of £175,000.”

However, Ms Heafford noted that the Residence Nil Rate Band has also been frozen until 2026 and the Chancellor will most likely freeze this alongside inheritance tax on Thursday.

As house valuations are increasing year on year, Ms Heafford noted the band might not actually be a helpful tool in reducing the inheritance tax someone pays anymore.

She added: “The freeze will provide all the more reason for individuals to seek professional advice as early as possible, and to maximise other tax reliefs and planning.”

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