Podcast: Who pays inheritance tax in the UK? An update on the current regulations
On this week's episode of the podcast, Paul & Megan chat to Andy Lewis from John Scott Davidson Ltd, and discuss what the current rules are around inheritance tax in the UK including when it is payable, who is liable to pay it and some tax efficient measures to take.
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Key Insights
Inheritance tax basics and history
Inheritance tax (IHT) is a tax on a deceased person's estate, encompassing property, cash, and assets. It applies to only around 6% of estates annually, generating approximately £7 billion for the UK government last year.
Current thresholds and reliefs
The standard threshold for IHT is £325,000. Additional relief of £175,000 (main residence nil-rate band) applies if passing property to direct descendants, increasing the total threshold to £500,000. For married couples or civil partners, the threshold can effectively double to £1,000,000.
Impact of frozen thresholds
Thresholds are frozen until 2030, not keeping pace with inflation or rising property values, potentially pulling more estates into the IHT bracket. This extended freeze is seen as a "stealth tax" by some commentators.
New budget changes
From 2026, agricultural and business reliefs will reduce to 50% for amounts above £1,000,000. Pensions will be included in estate calculations for IHT from 2027, which could double the number of estates subject to IHT. AIM shares and similar investments will also see reduced reliefs, potentially discouraging investment in smaller companies.
Double taxation concerns
If a pension forms part of an estate, it could face IHT and income tax when passed to beneficiaries after age 75, leading to a "double whammy" tax hit. Changes may require individuals to revisit their estate and pension planning strategies.
Importance of a will
Having an up-to-date will is critical for minimizing complications and ensuring tax-efficient wealth transfer. Families should engage in open discussions about estate planning to avoid unnecessary tax liabilities.
Gifting and Inheritance Tax (IHT) liabilities
Gifts may be subject to inheritance tax depending on their value and the time elapsed since the gift was given. Potentially exempt transfers (PETs) require the donor to survive seven years for the gift to avoid IHT. An annual tax-free gifting allowance of £3,000 per person is available, which can be carried forward one year if unused. Additional allowances exist for special occasions, like £5,000 for a child’s wedding or £250 gifts to an unlimited number of individuals.
Advice and planning
Professional advice (e.g., financial advisors, solicitors) is essential to navigate complexities and maximize tax efficiency. Open family discussions are encouraged to align goals and plans, especially in light of a significant intergenerational wealth transfer expected in coming years.
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