No changes in the Spring Budget for IHT
Posted on 25th March 2024
There were a lot of rumours ahead of the Spring Budget on 6th March about changes to inheritance tax (IHT).
Action was expected to make sure policy was clear ahead of the General Election later this year.
However, nothing was mentioned, leaving the government’s position unspecified despite other tax changes such as National Insurance Contributions (NICs). There were also changes to Child Benefit and VAT registration.
The main concern is that, as house prices rise and the IHT threshold remains frozen, more families will have to pay IHT. The hoped for increase in the nil rate band before IHT is payable wasn’t mentioned and remains at £325,000. This threshold hasn’t changed since 2009 and will probably stay the same until April 2028.
IHT raises billions for the government
The latest HMRC figures show that IHT raised £6.3billion for the government from April 2023 to January 2024. That’s an increase of almost 7% compared with the same period in the previous year, which raised £5.9 billion. The final total raised from IHT this year could amount to £7.5billion.
How to prepare for IHT
Families can review the entire value of their estate, including an up-to-date valuation of property. It’s worth looking closely at the IHT thresholds and rules. This will help to calculate the possible IHT tax bill and understand options to manage it.
You could, for example, invest in an Enterprise Investment Scheme (EIS) fund that supports innovative UK companies. This provides inheritance tax relief if you hold the shares for at least two years before death.
Increase your pension pot
IHT doesn’t apply to pensions so paying into a pension can reduce the size of your estate. Last year’s Spring Budget abolished the pension lifetime allowance, making extra pension contributions more attractive. However, there is still an annual tax free allowance for paying in to pensions. This increased from £40,000 to £60,000 in April 2023.
If a pension holder dies before their 75th birthday their beneficiaries inherit their pension pot tax-free. For people over 75, their beneficiaries can receive their pension as income and pay their marginal income tax rate. This means they could pay 20% income tax instead of 40% IHT.
However, the limit for the tax-free lump sum is just under £270,000. If someone planned to use this to pay their living costs, for example, other options could provide better solutions.
Give gifts
If you can afford to, you can reduce your estate by giving gifts. Gifts made during your lifetime can help keep the value of your estate below the IHT threshold.
As a UK taxpayer you have annual gift allowances from your capital. If you give more than your allowance, the seven-year rule means IHT will still apply on a sliding scale. However, this doesn’t apply to gifts made out of your income. To avoid the seven year rule for inheritance tax these gifts must be:
part of your ‘normal expenditure’ which you give regularly
paid out of income such as your salary or pension
affordable once you’ve paid your normal outgoings so you don’t reduce your standard of living.
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