FINANCIAL advisers have said more and more families are being caught out by inheritance tax (IHT) and that “most don’t realise it until it’s too late”. They urged people to seek advice as “many people can legally reduce or even eliminate an IHT bill altogether”.
The nil-rate band has remained fixed at £325,000 since 2009 and, although the residence nil-rate band was introduced in 2017, that too is now frozen. Over the same period, house prices and investment values have risen significantly.
Essentially, that means more estates are being pulled into the inheritance tax net.
Advisers say that what was once seen as a tax on the very wealthy is increasingly affecting those with a family home and modest savings — particularly in areas where property values have grown strongly.
Stealth tax
“Frozen thresholds and rising asset values are quietly dragging more and more families into scope, often without them realising,” says Scott Gallacher, Director and Chartered Financial Planner at Leicester-based Rowley Turton.
“The reality is that IHT is becoming a middle-class issue by stealth. Many families are being caught not because they’ve actively built significant wealth, but simply because asset values have risen over time.
“For some, it comes as a genuine surprise. They don’t feel wealthy, yet their estate may face a 40% tax charge on part of their assets.
“As a result, IHT planning is now a core part of our day-to-day work — and the good news is that with sensible forward planning, many can significantly reduce their liability.”
Voluntary tax
Eugen Neagu, Director at N2 Asset Management, agreed that IHT, despite its widening net, remains a “voluntary tax”.
He said: “With timely and sensible planning, such as using allowances, exemptions and lifetime gifting, many people can legally reduce or even eliminate an IHT bill altogether.”
Rob Mansfield, Independent Financial Advisor at Tonbridge-based Rootes Wealth Management, warned people to act early rather than leave it too late.
He said: “More and more families are feeling the IHT squeeze. It’s a combination of it being a poorly understood tax and the frozen rates dragging more people into the net.
“I’ve met with people terrified of inheritance tax who are never likely to pay it and others who are blissfully unaware of the six figure bill their families face on their death.
“It takes time to reduce the potential bill and so leaving it too late can drastically reduce your options.”
Estate planning
Eamonn Prendergast, Chartered Financial Adviser at Bromley-based Palantir Financial Planning, also reminded people that inheritance tax is no longer just a wealthy family problem.
He said: “Frozen thresholds, rising property values, longer life expectancy and stronger asset growth have quietly pulled more ordinary families into scope, often without them realising it.
“The nil-rate band remains at £325,000 and the residence nil-rate band at £175,000, with both now fixed through 2030–31, while estates above £2 million begin to lose the residence allowance altogether.
“From 6 April 2027, unused pension funds and death benefits will also be brought into scope for IHT, which makes early planning far more important. For many families, this means gifting, trusts and life insurance are moving from being optional extras to core parts of good estate planning”
Too late
Anita Wright, Chartered Financial Planner at Ribble Wealth Management, said the problem is that many people don’t realise they have an IHT problem “until it’s too late”.
She gave an example: “A couple who bought a modest family home in the North West, paid into workplace pensions, and kept some savings are now sitting on an estate worth well over the combined nil rate bands often without feeling remotely wealthy.
“They’re not buying yachts yet their children could face a 40% tax charge on everything above the threshold. The family home is overwhelmingly the main driver.
“In my experience, eight out of ten cases where families are unexpectedly caught by IHT, the house is doing the heavy lifting.
“The residence nil rate band helps, but it comes with conditions and tapers that many people don’t understand, and it doesn’t come close to offsetting 17 years of house price growth.
“The most effective IHT planning comprising gifting, trusts, insurance arrangements and pension structuring takes years to work properly.”
Unexpected
Like other advisers, Martin Rayner, Director at Compton Financial Services, said he is “seeing far more ‘unexpected’ IHT cases when retirement planning”.
He continued: “People who would not have been exposed five or ten years ago are now being caught simply due to rising asset values. The family home is now the main driver. In many cases, the property alone uses up most or all of the available allowances.
“Fiscal drag has fundamentally changed this tax. As Denis Healey said, it is “a voluntary levy paid by those who distrust their heirs more than the Inland Revenue“.
“In reality, most clients do trust their families, and that is why we are seeing more people planning earlier. With straightforward steps taken in good time, this is often a tax that can be significantly reduced or avoided altogether.”
