The future of inheritance tax

Most over 55s have no idea whether there might be inheritance tax (IHT) to pay on their estate — or what the liability might be.

Since 2009 the threshold above which IHT applies — known as the nil-rate band — has stood at £325,000 (or £650,000 for married couples and civil partners). The recent Budget froze the threshold at which IHT becomes chargeable for a further five years.

Above the nil-rate band, IHT is generally charged at 40%. However there are exceptions, in particular when assets are left to a spouse or civil partner; these transfers are normally IHT-free, regardless of their value. In addition, if parents leave a home to children or grandchildren the threshold increases to £500,000 using the residential nil rate band of £175,000. For married couples and civil partners this effectively means an estate of up to £1 million can be left to their children tax-free.

Simple steps to reduce IHT

You can reduce your IHT liability by giving away money or other assets before you die. But it has to be a real transfer – so, for example, giving away a property but continuing to live in it wouldn’t count.

  • Small gifts You can make unlimited gifts of up to £250 per recipient during the tax year. In addition, you can give away up to £3,000 per tax year — as one gift or multiple gifts —under the ‘annual exemption rule’.
  • Exempted gifts Further gifts are permitted each year for specific reasons, e.g. towards a child or grandchild’s wedding; or payments to help with an elderly parent or child’s living costs.
  • Larger gifts If you give away more than £325,000 in the seven years before your death these gifts may be subject to IHT. If you survive three years or more after making a non-exempt gift, taper relief reduces the tax payable on a sliding scale and no tax is payable if you survive the full seven years.

Potential reforms

Significant changes to IHT may be on the horizon. Last year an All-Party Parliamentary Group made a series of recommendations including a 10% tax rate on lifetime gifts over £30,000 per year, 10% on gifts on death up to £2 million and possibly 20% thereafter.

Meanwhile the Office of Tax Simplification (OTS) has also published recommended reform including:

  • Exemptions The three main exemptions – the £3,000 annual exemption (frozen since 1981), the £250 small gifts exemption (frozen since 1980) and the normal expenditure exemption (with no monetary limit), together with marriage gifts (frozen since 1975) – should be consolidated into a single annual gift allowance.
  • Business relief IHT business relief and capital gains tax (CGT) uplift on death can mean business assets pass with no IHT and no CGT, if sold immediately. The OTS proposed ending the CGT uplift.

While the future shape of IHT is uncertain, the tax itself is unlikely to disappear. If IHT is a concern for you the time to talk to us is now, especially as any reform could see the removal of some opportunities.


The Financial Conduct Authority does not regulate tax advice. Levels and bases of taxation and tax reliefs are subject to change and their value depends on individual circumstances. Tax laws can change.

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