Inheritance Tax: A beginner’s guide to what you need to know in 2023

Inheritance tax (IHT) is triggered by major life events and milestones that we all go through. And yet, a study conducted this year revealed that over 50 percent of UK adults are unaware of the nil rate band and their potential IHT exposure.

Private Client Associate Partner, Laura Dickson discusses key IHT considerations in 2023 and the importance of opening up the conversation with your tax advisor.

Although Inheritance Tax (IHT) doesn’t affect everyone, the number of people who are liable to pay IHT is increasing. The latest records reveal that a staggering £5.76 billion in IHT was gathered in 2020-21. And with receipts between April and July showing that £2.6 billion has already been collected this year, we are on track to hit another record high in IHT clawbacks.

When it comes to IHT there’s so much to consider. Yet 48 percent of people in the UK have never had a conversation with their tax advisor about their potential exposure. With that in mind, here is a beginner’s guide to IHT in 2023, including key tax triggers and reliefs you and your business could potentially benefit from.

What is IHT?

IHT is a tax levy due on the value of an estate. Typically, this happens when somebody dies, but it can also apply to lifetime gifts. IHT is usually charged at 40% of the total value of an asset, but as with many aspects of tax legislation, one size doesn’t fit all.

If an estate is valued at less than the available nil rate band (NRB), IHT will not be due. The NRB for the financial year 2023/24 is £325,000.

You could be exposed to IHT if you inherit an estate or receive a gift so it is important to understand the rules.

Gifting and chargeable assets

If an asset can be gifted then it has a potential to trigger an IHT charge. This includes cash, personal possessions, ISAs, stocks and shares, property and land.

It’s worth noting that pensions aren’t usually included in a death estate, so it’s always advisable to seek professional advice as this is a specialist area.

For most gifts made, a seven year rule applies. This is often referred to as lifetime gifting, where most gifts are treated as a Potentially Exempt Transfer (PET). This means that a gift will be IHT free only if the donor survives more than seven years after giving the gift away. 

However, if the person giving away the asset doesn’t survive seven years then there may be a tax liability. How much depends on the point in time the gift was given and when the person who gifted died:

• Three years before death will be taxed at 40 percent;

• Between three and seven years before death will be charged on a tapered rate;

• If the amount given doesn’t surpass the nil rate band (NRB), there will be no tax charge to pay.

If a gift is placed within a trust, different rules may apply. This is a chargeable lifetime event and the seven year rule does not apply here. The IHT due depends on various factors but broadly the IHT rate will be 20% (or 25% if the donor settles the tax).

What do you need to consider in 2023?

The latest HMRC figures released this summer revealed that inheritance tax liabilities were up by £800 million in 2020/21 compared to 2019/2020. That is a huge 16% increase on the previous year.

IHT remains a largely unchanged tax, but it’s this very reason why people should pay closer attention. Recent rumours indicate the government are looking at IHT but nothing has been confirmed. In 2023, it’s becoming increasingly important that individuals are aware of their potential exposure, because they are a lot more likely to be exposed than in previous years. One contributing factor in this is the frozen NRB that has remained the same since 2009, despite rocketing inflation and asset value.

What can trigger an IHT charge?

Lifetime gifts

It is important to be aware of lifetime gifts. Not only because of the PET rules that apply, as discussed earlier, but because any chargeable gifts made in the seven year period before a gift is made, will utilise the NRB. This can apply to all lifetime gifts, however small, unless exemptions apply.

When someone dies

IHT is largely associated with an individual passing away, it’s the reason so many of us put off thinking about our potential exposure. In what is inevitably already an emotionally trying time, the last thing you need is a surprise tax bill.

If you incur an IHT charge when someone dies, it will usually be paid by the estate, although it may be a personal responsibility when receiving a gift.

Marriage and divorce

If two people are married or are in a civil partnership, the transfer of gifts and estates between them will be exempt from any IHT charges. This exemption will last as long as the marriage does.

When you divorce, and the decree is made absolute, your IHT exemption will end. Past this point, any voluntary gifts that are made outside of the transferral of assets from the divorce could be subject to IHT if the person giving does not live for seven years proceeding.

IHT reliefs & reliefs for individuals and business owners

Rate bands

As mentioned, an NRB is available before IHT is calculated. If someone dies and they haven’t used all of their nil rate band, the unused portion can be transferred to the surviving spouse.

Similar to the NRB, there is a Residence NRB that may be available should you pass your home to your direct descendants on death. This could be an additional rate bad of £175,000.

Business assets

If you’re running a business then you may be entitled to Business Property Relief (BPR). This relief is usually available on business assets such as unlisted company shares or assets used in a business.

However, BPR is only available in specific circumstances. Broadly, in relation to company shares, the shares must be in a company that is not wholly or mainly dealing in investments. This can be complex and even if you believe the company is ‘trading’, it may not be ‘trading’ in relation to this relief.

Agricultural property

Similar to BPR, relief applies to the value of land and buildings used for agricultural purposes. You should consult an advisor to discuss your specific circumstances.

Annual exemption and Small gifts

You can give gifts worth up to £3,000 every year without triggering an IHT charge.

Small gifts such as wedding gifts could also qualify, but this depends on the amount the gift is worth and your relationship to the recipient.

Gifts to charity

Giving to a charity could be exempt from IHT. If at least 10% of the baseline value of an estate is gifted to charity then the IHT rate could be reduced from 40% to 36% and is applied to the entire value of the estate, in addition to the actual gift being exempt.

Heritage property

Assets that are deemed to be heritage property are not chargeable for IHT. You would need to prove that there is some historical significance behind the asset in order to qualify for the exemption.

It’s worth noting that the rules behind this are very detailed, including ongoing conditions that would need to be met. If you have an asset that could apply, speak to your advisor.

Opening up the conversation with your advisor

Importantly, other taxes such as Capital Gains Tax and Stamp Duty need to be considered when making or receiving a gift. The ways in which they link and implicate each other can complex, and therefore speaking to an advisor about your unique circumstances is essential in receiving the most robust advice possible.

Here to support you

Whether you’re well versed on the ins and outs of IHT or you’re taking your first steps in learning your potential exposure, it’s important to open up the conversation with your tax advisor.

We have a team of specialist tax advisors on hand to guide you through the nuances of IHT. We are well equipped to review your tax options and walk you through your next steps.