Industry News

The Future of Inheritance Tax

KLOFinancial |

Many people are unaware of whether they are liable for inheritance tax on their estate. However, there are changes on the way, so understanding IHT may be more important than ever before. By speaking to a local financial adviser, you will gain insight into the fundamentals and the ways to reduce inheritance tax. They will also support you with reaching your long-term financial goals through personal financial management.

The Budget 2021 has placed a freeze on the £325,000 IHT threshold (or £650,000 for married couples and civil partners) until 2025/26. This nil rate band threshold has remained the same since 2009, however, this freeze means that more estates could become subject to IHT liability – but why would this happen?

A freeze prevents the nil rate band threshold from altering in line with the rise in people’s net worth. Natural inflation will cause prices to increase, especially the value of housing, which could result in the threshold of £325,000 being exceeded.

What is Inheritance Tax (IHT)?

IHT is paid on the value of assets over the given threshold and is generally charged at 40%. However, with the correct financial planning with your financial adviser, you can utilise exemptions to reduce the amount of inheritance tax you pay.

How can I reduce IHT?

The most efficient way to reduce the amount of payable tax is by leaving your assets to a spouse or civil partner. Regardless of their value, these transfers are exempt from inheritance tax on first death.

However, if parents leave a home to their children or grandchildren, the threshold potentially increases to £500,000. This is the due to the £325,000 IHT nil rate band being combined with the residential nil rate band. As a result, for married couples and civil partners, this means that up to £1million can be left to their children and grandchildren tax free.

In addition, by giving away money or other assets throughout your life, you can potentially reduce your IHT. We have outlined 3 simple steps you can take:

Small gifts

During each tax year, you can make unlimited tax-free gifts of up to £250 per recipient. On top of this, the ‘annual exemption’ rule allows you to gift up to £3,000 per tax year without paying IHT.

Exempted gifts

Some additional gifts are non-taxable, including gifting £5,000 towards a child’s wedding or £2,500 towards a grandchild’s wedding, as well as payments to support an elderly parent or child under 18 years old.

Large gifts

If you gift more than £325,000 within seven years of your death, the recipient may be liable for tax payments. If this non-exempt gift was made over three years before your death, taper relief may reduce the amount of IHT payable, this reduces after this on a yearly basis, eventually becoming tax-free after seven years.

What changes are being considered?

Last year, reformation recommendations were made by an All-Party Parliamentary Group and the Office of Tax Simplification.

The All-Party Parliamentary Group suggested reforms such as:

  • 10% tax rate on lifetime gifts over £30,000 per year
  • 10% tax rate on gifts given on death up to £2 million, and 20% on gifts higher than this

Whereas the Office of Tax Simplification (OTS) published their recommended reforms, which included reforms to exemptions and business relief:


The OTS suggested that the various gift exemptions should be combined into a single annual gift allowance, replacing the individual £3,000 annual exemption, £250 small gifts exemption, wedding gifts and normal expenditure exemptions. Although an amount wasn’t specified, they mentioned that over half of all normal expenditure claims are under £25,000 per tax year.

Business Relief

They prosed to end the capital gains tax (CGT) uplift, as this and business relief means that businesses sold immediately after death go through without many assets being affected by IHT or CGT. However, we believe that the Chancellor will take a different view, due to the growing popularity of portfolios.

KLO Financial Services

We offer a range of financial services, including support with personal financial management and understanding inheritance tax, to ensure that our customers make effective decisions that benefit the future of their finances.

If you want to find out how our expert financial advisers, in Warwick, Birmingham and London, can support you, get in touch on 0121 7264720 – our team would be happy to help!