High inflation, rising house prices since 2010 and frozen inheritance tax reliefs for over a decade is having a significant impact on the tax position of UK families, with more of them now liable for inheritance tax on their total estates. Are you impacted?

What are the current inheritance tax reliefs available?

Every UK individual has a ‘nil-rate band’ of £325,000 and this amount has remained unchanged for more than a decade.
The nil-rate band means that when you die, and your estate or everything you own is valued, there is no inheritance tax charge on your estate of up to the value of £325,000. So for a married couple, you each have £325,000 or £650,000 combined.
You also have the residence nil rate band on top of this standard nil-rate band. The residence nil rate band means that if you own a home and you pass this down to your direct descendants, the first £175,000 of your home’s value is not included in any inheritance tax calculations.

Both the residence nil rate band and the standard nil-rate band will be frozen at these rates until April 2026.

Because neither tax reliefs have risen in line with inflation or the increase in house prices in the last decade, more families are now having to consider what they can do now in their lifetime, to avoid legally paying inheritance tax, or at least reducing the amount for their loved ones left behind, who have to pay it closely after your date of death.

Interestingly, PwC have calculated that if the nil-rate band had indeed increased in line with inflation, it would currently stand at £478,078, over 30% more than what is today, or a further £153,078 of your estate would not be taxed and left for your loved ones instead.

What if inflation continues to rise?

Inflation is set to reach a forty year high by the end of 2022, and continue at this rate or higher into 2023.

This means that the value of your estate is increasing, and the value of your homes too are increasing. So if you are already being proactive with inheritance tax planning, the increase in inflation will mean that you may need to revaluate your tax position again.

And for those who have never even considered inheritance tax planning, you may now need to consider it, to avoid your legacy being sold off by your loved ones after your death in order to pay for a large inheritance tax liability.

Also, due to stronger than average house price rises, the UK government has collected higher than forecast inheritance tax from families since 2010.

When is the right time to do inheritance tax planning?

Many families affected by inheritance tax will recognise they are in financially strong position and can proceed with estate planning.

But you may be put off by doing any estate planning in the current cost of living crisis. You may wonder what the priority is for coping in the here and now and considering future tax planning as a medium or long-term priority.

Just as it is common for people to underestimate how much they will need for retirement, it is no different when it comes to Inheritance Tax (IHT) planning and managing the risk of a large IHT liability.

For example, being proactive and making gifts in your lifetime will help reduce your IHT liability overall, and these gifts can be managed over a period of time as you draw closer to retirement to help minimise your IHT exposure.

You could consider making investments which qualify for Business Relief (BR). Investments that qualify are high risk, high reward investments and offer three significant advantages - speed, growth, and access. Because they are investments in fast growing trading businesses, that may fail, the risk is high but the tax reliefs available to compensate for these investments is very good.

When you make a BR qualifying investment and hold it for two years, it is no longer included in your estate for IHT purposes, or it is considered as a zero-rated. The caveat is that the investment must be held for the entirety of your lifetime to then pass on free from IHT to loved ones. So you are investing in future growth companies, with the possibility of high reward, whilst also reducing your IHT liability.

Usually when making an investment, you can get access to your capital or investment at any time if the investment does indeed grow, so another reward for making a more risky investment.

BR-qualifying investments are great if you are starting out estate planning early on in life and the investments have time to grow, enjoying any capital growth during your lifetime, and removing from your estate for IHT purposes. Looking at AIM listed companies to invest is a great option.

Remember that the value of an investment, and any income from it, can fall as well as rise.

Tax treatment depends on individual circumstances and tax rules could change the in the future. The shares of smaller and unquoted companies could fall or rise in value more than other shares listed on the main market of the London Stock Exchange. They may also be harder to sell on.