PLANNING FOR INHERITANCE TAX CHALLENGES AS PENALTIES SURGE IN 2022/23 TAX YEAR

Released On 28th Sep 2023

Inheritance Tax (IHT) is an essential aspect of estate planning and must be done correctly – with HM Revenue & Customs (HMRC) collecting a significant £2.28 million in IHT penalties in the last tax year, it is evident that the complexities surrounding IHT are catching many families off guard.

The nil-rate band and main residence extension

IHT is levied at a standard rate of 40 per cent on estates exceeding the nil-rate band, which is currently set at £325,000.

However, this threshold can be effectively increased to £500,000 if you leave your primary residence to direct descendants, thanks to the residence nil-rate band.

Lifetime gifts and Potentially Exempt Transfers (PETs)

Certain gifts made during your lifetime can be classified as Potentially Exempt Transfers (PETs). These gifts will only be subject to IHT if you die within seven years of making them. Any IHT due on the gifts decreases annually after the third year, thanks to taper relief.

Business and Agricultural Relief

Some business and agricultural assets may qualify for Business Relief or Agricultural Relief, reducing their value for IHT purposes by up to 100 per cent.

Who bears the IHT burden?

Executor/Administrator: Usually responsible for calculating and paying the IHT due from the estate’s assets.
Trustees: Responsible for any IHT due on assets held in a trust.
Beneficiaries: May be liable if they receive a gift or asset that becomes subject to IHT.

Calculating IHT

There are a number of potentially time-consuming steps including:

Valuation of complex assets: This includes shareholdings, business interests, and overseas assets.
Claiming reliefs and exemptions: Ensure you claim all applicable reliefs like Business Relief, Agricultural Relief, and Spousal Exemption.
Finalising the tax position of the deceased for the final period up to the date of their death

Deadlines, penalties, and the £2.28 million warning

IHT must be paid within six months from the end of the month in which the deceased passed away.

Failure to meet this deadline can result in late payment penalties, interest charges on the unpaid amount, and even investigations into why the IHT was unpaid which can result in further penalties.

The amount of IHT paid in the 2022/23 tax year totalled a record £5.76 billion, up 16 per cent from the previous year, and the £2.28 million collected by HMRC in fines was a staggering 34 per cent increase on the year before.

These figures suggest that more and more families will be dragged into the problems caused by IHT, so it is crucial that these challenges are faced head-on and planned for accordingly to avoid financial difficulties.