Recent HMRC figures highlighted an increasing level of inheritance tax (IHT) receipts this year, with a total revenue of £2.7bn between April and August, which represented a £0.7bn (35%) increase on the same period last year.
Strong price growth in both house and share values, coupled with the current freeze on both nil rate bands (NRB) and residential nil rate bands (RNRB) allowances until 2026, means more and more estates will become subject to IHT, and the yield received by HMRC will continue to rise.
It is more important than ever to consider in-life wealth planning options to mitigate any future potential IHT exposure, but to also consider how those left behind will finance any tax bill that remains.
IHT regime and planning
The IHT regime has had few changes since its introduction in 1986 (following the 1984 Inheritance Tax Act), however some changes have been significant. Two that stand out are (i) the transferring of NRBs for spouses and civil partners; and (ii) the introduction of the RNRB where homes are transferred to direct descendants.
Therefore, the first thing to do is to check what a person's IHT position is. Depending on the circumstances a person could be entitled to an effective NRB of anything between £325,000 and £1,000,000.
It is also important to have a will. This is not just for potential planning, but it ensures a person's estate does not fall into the intestacy rules which may have adverse consequences – for example, if a person dies leaving a spouse and children, the spouse may not inherit all of the estate with the children inheriting part of it.
This would mean that the spouse exemption (and NRB) may not cover all of the estate and so some inheritance tax may be due.
One planning point with regard to wills is where a certain amount is left to charity, the IHT rate is reduced from 40% to 36%.
With regard to lifetime planning this is certainly an area to watch in this month's Budget. There are currently a number of ways to mitigate IHT during a person's lifetime. The main ones being:
- potentially exempt transfers (PETs) – ie, making gifts and then surviving seven years;
- annual exemptions of £3,000; and
- making regular gifts out of excess income.
However, in January 2020 the All-Party Parliamentary Group reviewing IHT published its report. Among other things, while it advised that spousal exemptions remain, while PETs and regular gifts out of excess income should be abolished and replaced with larger annual exemptions (the example given was £30,000 with a tax charge on amounts above this).
Given the position the Chancellor is in, one could imagine this sort of change appealing. It would potentially mean that tax collected from wealthier families would rise, but with no impact on the vast majority of people.
Financing the IHT bill
Nevertheless, estate planning for tax efficiency can only go so far, and the reality is that the wealthier the estate the more difficult it becomes to avoid paying IHT. Given that an estate is effectively locked until probate is granted, and that IHT has to be paid within six months, how can executors and beneficiaries find the necessary liquidity to settle the tax and bridge the gap?
Executors are ultimately accountable for overseeing the administration of the estate and distributing assets accordingly. It remains, however, the responsibility of the beneficiaries collectively to work with the executor to find an agreeable solution to discharging all liabilities and other testamentary outlays that cannot be covered by the estate itself.
It is possible that sufficient cash exists among beneficiaries but given that the average IHT bill now exceeds £200,000, it is unlikely that this is a realistic and viable option for most estates as high net worth individuals are often asset rich but cash poor.
With interest rates on current accounts likely to remain at current levels for the foreseeable future, high net worth people are more likely to have moved away from traditional saving accounts in favour of a portfolio of investments which cannot be accessed so readily, or without compromise.
There are a number of financial options that rely on secured lending, including re-mortgaging, traditional bridging loans, or personal loans. While these solutions provide a potential alternative, they can carry significant personal risk depending on how the loan has been secured. If probate is delayed or the estate becomes contested, many secured loans can quickly become more costly than originally thought.
The contemporary solution is a specialist probate bridging loan. Depending on the value of certain assets within the estate, it is now possible to release cash from a locked estate in order to pay for IHT. These short-term loans are not secured on the individual borrower but instead against the estate itself using an equitable charge, loans often require no monthly servicing, and are typically paid back once the estate is distributed following the grant of probate.
Such a solution also provides beneficiaries with the opportunity to advance funds from a forthcoming inheritance, for other more personal time-sensitive spends such as investment opportunities, private medical care, or school fees.