Lightening the Unequal Burden of Inheritance Tax

By Eleanor Worby

Trust and Estate Tax Accountant

From a review of a recent release of National Statistics looking at estates passing on death requiring a grant of probate or letters of administration in the 2020-21 tax year, there are some stand out points illustrating that the inheritance tax (IHT) burden is geographically skewed, with London and the South East shouldering a large part of the burden but also that there are some valuable nil rate bands and reliefs to be taken advantage of.

  • 47% of estates that paid inheritance tax (IHT) are based in London and the South East of England
  • an average IHT bill in London was £279,200
  • estates valued between £2 million and £7.5 million have the highest effective tax rate of all estates
  • the average amount of tax paid per estate is steadily increasing at a rate of 3%
  • 36% of estates take advantage of the spouse and civil partner exemption
  • £6.2 billion of chargeable estate value was sheltered from IHT by the Residence Nil Rate Band
  • £4.2 billion of Business Property Relief and Agricultural Property Relief was claimed

Although less than 5% of deaths result in an IHT tax charge this is increasing and nearly half of the deaths resulting in IHT being payable are located in London and the South East.  Also increasing is the average amount of IHT paid by an estate.  The average liability per estate in 2020-2021 nationally was £214,0000 but in London it was £279,200.

With offices in Bishops Stortford, Hertfordshire and London Nockolds are ideally situated to meet with our clients to discuss the potential impact of IHT on their estates and identify the best way to maximise the exemptions and reliefs available to them.

The increase in the tax to be paid is generally a combination of rising house prices combined with the fixed level for the tax free allowances; the nil rate band at £325,000 and the residence nil rate band at the full rate of £175,000 until 2026.  This means more estates will fall into the IHT net making the value of taking IHT planning advice all the more important.

The statistics show the value of IHT exemptions and reliefs, however taking advantage of these is not always straightforward.  All assets transferred between husbands and wives and civil partners are exempt from IHT and the nil rate band available on the death of the first of the couple can be preserved to be used on the second death.  This is not the case for people living together.

The residence nil rate band is a tax free amount that can be set against your home if it is inherited by your children or grandchildren. The rules are full of trips and traps; for example the nil rate band is available if your step-children inherit your home but it is not available if the children of your partner inherit the property.  The availability and application of residence nil rate band is considerably more complex than the nil rate band and it is always worth taking advice to check this additional tax free band is available to you and to ensure you are capturing the maximum benefit.

Finally, can you take advantage of the valuable reliefs for business property and agricultural property in the way that the super-rich are?  These reliefs are often the reason an estate valued at more than £7.5million will pay a lower effective tax rate than estates with a lower value. The availability of these reliefs is covered by strict rules.  We can advise you on whether assets you hold will be eligible for the relief and on future investments to take advantage of these reliefs.

At Nockolds our experienced team of solicitors, accountants and financial advisors will work together to provide you with a full estate planning service including a review of the assets in your estate and the IHT exemptions available to you and how to maximise the use of IHT reliefs and how to plan for your executors to settle any IHT liability.

As is often the case the availability of reliefs and exemptions is not straight forward.  We can assist you in understanding the exemptions and reliefs available to you dependent upon your circumstances and your wishes.

If you have any queries relating to anything discussed in this article, please contact our Wills & Probate Team on 0345 646 0406 or fill in our online enquiry form and a member of our Team will be in touch.