Inheritance Tax

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Inheritance Tax Nil Rate Band Freeze to 2028: Understanding the Impact and Implications for Estate Planning

What has changed in the 2022 government budget regarding inheritance tax and what does it mean for us? The nil rate band allowance for inheritance tax remains the same until 2028. This may have gone unnoticed by most; tax increases grab the attention and the headlines but what does the status quo of the inheritance tax allowance mean for us? I will analyse the ramifications of this in more detail below.

Firstly, to understand the impact of inheritance tax, we must understand what inheritance tax is. Inheritance tax, also known as ‘the death duty’, is the tax that is chargeable upon a person’s assets i.e. their property, bank accounts, cash, stocks, shares etc at the date of their death. For some, this comes as a surprise – you mean you are taxed after you die? Having paid taxes all your life? The short answer is yes.

The idea behind this tax

is for the state to redistribute wealth for the benefit of the public rather than for wealth to stay within inherently rich families for multiple generations. Historically, inheritance tax, originally called ‘probate duty’ was introduced as part of the `Stamps Act 1694’ to fund England’s participation in wars and battles. This fund became known as ‘legacy duty’ in 1780, although this generated very little funds until reforms made it a ‘must’ for executors to account for the property they were dealing with.

In the UK, a person who is domiciled in the UK (which means a person who usually or predominantly lives in the UK), is taxed on all the property that they own whether the property is in the UK or abroad above the value of £325,000 per person. The nil rate band can be rolled over between spouses to enable this amount to double to £650,000 on the death of the second partner. The rate of £325,000 is called the ‘nil rate band’ which means that a person’s wealth up to the value of £325,000 is liable to be taxed at 0% and for anything above that amount the rate of tax is 40%. Note, to lessen the impact of this charge, various exemptions and reliefs are available which I will not cover within this article.

In 2022, it was announced by the UK government

budget that the inheritance tax nil rate band would remain frozen at £325,000 for a further 6 years until 2028. This means that the nil rate band has been at the rate of £325,000 for over 13 years, since April 2009. By 2028, the nil rate band will remain the same for 19 years. Before 2009, there was a gentle increase in the inheritance tax threshold almost every year to reflect the increase in house prices. The freeze at £325,000 has remained the longest-ever freeze of the nil rate band since 1946.

One may wonder what the impact is at a time when the average house price has increased almost twice or maybe thrice-fold since 2009. One would naturally believe that this would mean a lot more people are caught by inheritance tax provisions now than ever before; yes that would be correct. According to the ‘Inheritance Tax statistics: commentary’ last updated 28 July 2022, it has been recorded that there has been a 14% increase in inheritance tax receipts between the years 2020 – 2021 to the year 2021-2022. The tax receipts are now at their highest level ever on record, this is despite the introduction of an additional residence nil rate band known as RNRB in 2017, which is a complicated inheritance tax allowance that gives an additional allowance of a further £175,000 for those who have a primary residence that passes to a direct descendent. Other conditions apply to this extra allowance which is not covered within this article.

What does all of this mean for individuals? It means that a lot more estates will be liable to pay inheritance tax unless a person tax plans for their family and leaves them safeguarded from the heavy inheritance tax charges resulting from their estate. In this day and age, a person owning assets over £325,000 is quite easily achieved given the exponential rise in house prices. It means that families who are not necessarily ‘wealthy’ can no longer save money on inheritance tax charges to pass wealth to the next generation. It also means grieving families have to pay heavy tax charges due within 6 months of a person’s death, at a time when they are still processing a loved one’s death and having to consider selling up the deceased’s assets to pay the inheritance tax charges due on the estate.

At ABA Solicitors Ltd, we help families to consider their tax liabilities and considered tax-efficient ways forward within the remit of the law and UK legislation systems both during the will and estate planning process and also for families after the death of a loved one. It is even more imperative for people to make wills and be aware of the tax liability charge for their estate.

Anuara Ali is Solicitor at ABA Solicitors Ltd, a law firm that specialises in Private Client Law. Ms Ali has over 19 years of experience in Private Client Law, including wills and probate. With her extensive experience in this field, Ms Ali is well-equipped to help clients navigate the legal issues surrounding these matters.