The impact of Inheritance Tax on You and Your Family – How Reform Can Help

Inheritance Tax is one of the most widely resented taxes to be levied on the British people. Polls consistently show the majority think that Inheritance Tax (IHT) is an unfair tax, seeing it as a form of “double taxation”, by forcing taxpayers to pay out on assets & savings accumulated from already taxed income when they die.

This might seem surprising since only around 5% of estates (currently about 30,000 & rising) in fact pay the tax each year but of course the tax does impact on many more estate beneficiaries, typically children, grandchildren & other family of the deceased, by reducing the inheritance they receive.

That number must average somewhere around 100,000 people every year by now & over a few years that’s a lot of people who are losing out. And while only a minority of Britons may be directly affected, we can all hope that our own hard work and enterprise will make us sufficiently well off one day to have this same problem affect our own families. In effect, many people see IHT as a tax on aspiration.

The problem has been greatly exacerbated in recent years as successive governments have used IHT as a cash cow by freezing the allowances originally intended to ensure it was a tax paid primarily by the rich. Nowadays, anyone with a semi-detached house in the south east of England will almost certainly be at risk of incurring this tax, along with many others elsewhere, despite not considering themselves to be especially wealthy.

In addition, the current Labour government is vigorously pushing even further into what it plainly regards as a highly lucrative trough by further taxing the estates of small business owners & family farmers, thus imperilling the continuing viability of these enterprises, & now, even pension plan holders – all grist to their ever voracious mill.

The following pages explain how Inheritance Tax actually works but by going to https://www.reformparty.uk/ & making a substantial donation now you can help attack this problem in two important ways:

Reform UK is a qualifying political party so your gift as an individual will be instantly exempt from Inheritance Tax, as explained in the following notes. There is no waiting period required. Your gift will be immediately outside your estate so your potential IHT liability will be reduced by 40p for every £1 you donate. That’s an immediate 40% Inheritance Tax reduction on your donation.
Reform UK believes that Inheritance Tax is an onerous tax & has clearly pledged to abolish it altogether as soon as practically possible. Your donation will be used to further our work, improve the effectiveness of our campaigning & help to ensure the next government of the country is a Reform UK government, which will help us to remove this unfair tax.

What is Inheritance Tax & how does it work?

IMPORTANT DISCLAIMER: Any opinions expressed herein are solely those of the writer & are not official Reform UK policy. All wording is precisely chosen & other meanings should not be implied. These notes are not completely exhaustive & are intended to raise general awareness only. They should not be taken as any form of advice in any situation. Appropriate professional advice should always be sought if further information is desired.

“Only when we stand on the bedrock of reality can we make truly informed choices.” The first step towards mitigating any problem is to understand it. Very briefly, Inheritance Tax (IHT) is a tax payable to His Majesty’s Revenue & Customs (HMRC) within 6 months of the death of a UK domiciled person, at 40% of the total value of their worldwide assets. (A non UK domiciled person will be taxed at 40% of their assets within the UK.) Interest is charged at 8.5% per annum on any late payments.

Where IHT is due or more information is needed, the executor must report the value of the estate to HMRC using form IHT400 (see www.gov.uk/inheritance-tax ) & HMRC will calculate the amount due. A Grant of Probate is required to allow executors the authority to manage the estate & distribute assets. This is not usually issued until IHT has been paid. In some circumstances it may be possible to agree delayed payment terms with HMRC. Interest will continue to accrue.

HMRC expect the estate executor to make very extensive enquiries of all possible sources to discover & report all assets. They are also very happy to receive & investigate information from the public, including from possibly disaffected persons. Negligent failure to declare assets carries a penalty on discovery of up to 100% of the unpaid tax in addition to the IHT due. Deliberate evasion is a criminal offence with additional potentially severe penalties including imprisonment.

There are exemptions & allowances. The most important ones on death are :

All assets left to a legally wedded spouse or civil partner are exempt. Note this exemption does NOT apply to anyone else at all, such as a divorced former spouse or an unmarried couple (which probably explains why so many longstanding couples finally marry at the last minute – a risky strategy perhaps).
The first £325,000 of the estate is charged to IHT at nil rate (the ‘nil rate band’ or NRB). That nil rate band can be left in whole or in part to a surviving spouse or civil partner meaning there could potentially be a nil rate band totalling up to £650,000 on the death of the last surviving spouse.
In addition there is Private Residence Relief (PRR) of up to £175,000 which applies to your personally owned main residence only (PRR is sometimes also referred to as the Residential Nil Rate Band, or RNRB). Again, this can be left in whole or in part to a surviving spouse or civil partner meaning there could potentially be PRR relief totalling up to £350,000 on the second death.
Note that once a total estate reaches £2 million, the PRR is progressively reduced by 50p for every £1 of estate value above that, so by the time the estate is worth £2,700,000 the PRR allowance is nil.
The effect of these allowances means that a legally married couple with a joint estate below £2 million could therefore leave up to £1 million in total, completely free of IHT, to their children or other descendants on the death of the last surviving spouse. Any excess over that £1 million would be taxed at 40%.

During your lifetime you can give assets away, but the onus is always on you (via your executors) to show records to HMRC demonstrating why any gifts made within 7 years of your death should not be counted within your taxable estate.

Some gifts are immediately exempt from IHT. All transfers of cash or assets between legally wedded spouses or civil partners are exempt. You can also give away up to a total of £3000 a year to anyone you wish immediately tax free, which gift can be backdated up to 1 tax year. So a married couple could make an exempt gift of £12,000 between them in any one tax year if they had not used that allowance in the previous year.

In addition:

You can give as many gifts of up to £250 per person as you want each tax year, so long as you have not used another allowance on the same person. Birthday or Christmas gifts you give from your regular income are exempt.
You can make regular payments to another person, for example to help with their living costs. There’s no limit to how much you can give tax free, as long as you can afford the payments after meeting your usual living costs, you pay only from your regular monthly income, not from capital, & your normal standard of living is not reduced by the gifts. You will need comprehensive records for each tax year to prove it – use HMRC form IHT403 to do this.
Gifts for weddings or civil partnerships: each tax year, you can give a tax free gift to someone who is getting married or starting a civil partnership. You can give up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, & £1,000 to any other person.

So for example, paying for family to accompany you on holiday will be considered a gift, unless you can demonstrate their presence is necessary in order to provide care for you in some way during the holiday.

You can also give unlimited amounts immediately tax free to a charity, or to a political party which has at least two serving Members of Parliament (source: HMRC IHT manual IHTM11196 – Gifts to political parties: requirements for a qualifying political party). Such gifts are immediately exempt from Inheritance Tax thus instantly reducing your IHT liability by 40% of the donation made. If you would like to know more about donating to Reform UK in this way, please do not hesitate to contact your local branch chairman.

Non exempt gifts: any gifts in excess of these allowances will be chargeable or potentially chargeable to Inheritance Tax at up to 40%. They are called either Potentially Exempt Transfers (PETs) or Chargeable Lifetime Transfers (CLTs).

A Potentially Exempt Transfer will apply when an individual gifts cash or assets to another individual or to a disabled trust, & will become actually exempt from IHT if the donor lives a further seven years.

So for example, if you give say £100,000 in cash or kind to your children & then die within 7 years, the whole gift will be added back into your estate & assessed to calculate how much IHT would have been charged on it as part of your estate on death. In this case the answer is nil (as £100,000 is within the nil rate band of £325,000 where assets are charged to IHT at nil rate) so the gift would be ineffective in reducing IHT on your estate on death as it would simply use up the first £100,000 of your nil rate band. If you survived the 7 years, the gift would fall out of account altogether & would then have saved £40,000 IHT on death.

If instead you gave say £500,000 & died say 5 years & 1 day later, the situation would be different. There would be a surplus of £175,000 over the nil rate band, taxed as follows:

£175,000 @40 % = £70,000 IHT; less tapered relief discount of 60% = £42,000. IHT to pay on that gift therefore is (£70,000 – £42,000 =) £28,000 tax to pay.
There is no discount for the first 3 years after the gift, then a 20% discount after 3 years rising by a further 20% each year until after 7 years the discount reaches 100% so there is no tax to pay on the gift.
Remember there is no tax to pay on the first £325,000 of the estate so non-exempt gifts (PETs) totalling less than that amount will not reduce IHT at all until a full 7 years have passed.

Transfers by an individual which are not either exempt or a PET will be a Chargeable Lifetime Transfer (CLT). The main category of affected transfers will be transfers into any kind of trust, except those for the maintenance of a vulnerable beneficiary.

A CLT will be subject to an immediate charge to IHT at 20% where the value of the CLT, when added to any other CLTs made by the donor in the preceding seven years, exceeds the IHT nil rate band (currently £325,000). If the donor dies within 7 years of making the CLT a further liability to IHT may arise. If they survive 7 years, there will be no further IHT payable from their estate but there is no refund of any IHT paid at outset.

Trusts receiving such CLTs will themselves be subject to assessment every 10 years for a periodic charge to IHT of up to 6% of the total assets in the trust, less the nil rate band. Please note the taxation of any distributions to beneficiaries from such trusts is complex & beyond the intended scope of this document.

Anti avoidance measures. It’s worth taking a quick look at 2 of the most commonly misunderstood of these.

Gifts with reservation of benefit (GRoB): Say you give your house or holiday home to your children, but you continue to live in it or use it yourself, you don’t pay them a commercial rent for occupancy, you perhaps carry on paying for the bills & maintenance & generally behave as if you are still the owner. That’s a GRoB. You have nominally disposed of an asset but in fact continued to enjoy it yourself. HMRC will include it within your estate for IHT purposes. If you want to make an IHT effective gift your executors will need to show HMRC a well-documented audit trail proving it wasn’t a GRoB.
Leaving the UK to move abroad: From April 2025, the old domicile rules have changed. A new regime for inheritance tax based on residence is now in effect. Domicile is replaced with the concept of “Long Term Residence” when deciding if an individual’s foreign assets should fall within the scope of UK Inheritance Tax. A Long Term Resident is someone who has been resident in the UK for tax purposes for 10 out of the previous 20 years and those individuals will pay Inheritance Tax on their worldwide assets from April 2025.

Additionally, a taxpayer who decides to leave the UK might remain a Long Term Resident for IHT purposes. This will depend on their previous periods of residence in the UK and can have far-reaching consequences. An individual who leaves the UK after 20 years will therefore remain within the scope of UK IHT on their worldwide assets for up to 10 years after they have left. This does offer greater certainty when compared with the old system (which however required a minimum UK resident period of 17 years).

Of course, a foreign national who is resident but not long term resident in UK for IHT purposes will always be assessed to pay IHT on their assets within the UK.

Inheritance Tax changes in the October 2024 Budget

Rachel Reeves made several major changes to Inheritance Tax on October 30th, 2024:

Pension Funds

Since 2015 people have been able to drawdown an income directly from their accumulated pension funds without the need to buy a pension annuity at age 75. This raised the possibility of some residual pension funds being left over after death, which could then be passed across to your children free of inheritance tax.

From 6 April 2027, pensions will no longer be exempt from inheritance tax so any remaining funds will be added to your other assets when you die & assessed for IHT at 40%.

In addition your beneficiaries will also pay income tax, as any withdrawals they take from your residual pension fund will be added to their own incomes each year & taxed accordingly at 20%, 40%, 45% or effectively more if certain income thresholds are crossed, so the minimum effective tax take will be 52% or more of the residual fund.

Adding pension funds to an estate value will be particularly onerous for those whose estates are near or above the £2 million threshold (perhaps on second death after all the joint assets of a married couple have been accumulated in the ownership of the last surviving spouse). It will then cause the reduction or complete removal of the Private Residence Relief, by 50p for every £1 over the threshold, costing up to a further £140,000 IHT if the estate totalled £2.7 million & the entire joint PRR relief was lost.

In that situation, by the time the beneficiaries have paid the Income Tax on the residual pension fund after IHT, the total combined effective tax rate paid on the pension fund will vary between 68% to 84% depending on their income from other sources.

Family farms

Traditionally, 100% Agricultural Property Relief has meant that working farms were always exempt from Inheritance Tax, meaning they could be passed down the generations intact. From 6 April 2026 that will no longer be the case as the 100% Agricultural Property Relief is to be capped at £1 million, & IHT to be levied at 20% above that. For farms owned by two people, it may be possible to structure the farm’s business affairs to make use of both of their £1 million tax-free allowances for agricultural property inheritance.

Full details are yet to emerge but the interaction between the IHT nil rate bands, Agricultural Property Relief & Private Residence Relief promises to be interesting. The average value of a farm in UK is apparently around £2.3 million, excluding the farmhouse & the farm machinery, so if the total value is £4 million the IHT is liable to be somewhere well above £200,000. In many situations it will not be immediately obvious how the heirs could pay that & at the same time continue to keep the farm going as a viable working unit.

Privately owned businesses (not publicly quoted)

Again traditionally, 100% Business Property Relief (BPR) has meant that private trading businesses such as family owned firms (whether incorporated or not) were always exempt from Inheritance Tax, for the same reason of enabling them to be passed down the generations as going concerns. (BPR was never available to investment businesses.)

From 2026 that will no longer be the case as the 100% Business Property Relief is also to be capped at £1 million, & IHT to be levied at 20% above that. For firms owned by two people, it may be possible to structure the company’s business affairs to make use of both of their £1million tax-free allowances for business property inheritance.

Actively trading private businesses in UK are a vital sector of the UK economy. However, valuing such a company is a very complex procedure, perhaps more so on the death of a working shareholder. It should be remembered that there is no readily available market for a minority shareholding in a private limited company unless it is to another existing shareholder wishing to increase his or her holding. In a family owned company that is perhaps less likely to be the case.

Regardless, a firm with a nominal value of say £5 million is likely to face IHT liabilities in excess of £400,000 & if the value is £10 million the bill will be in excess of £1.4 million. It may be difficult to raise finance for that as potential lenders will be aware the money is not to be used for the benefit of the enterprise itself & the loan repayments will be a continuing drain on the business. Private firms therefore may have many or more of the same liquidity problems as family owned farms.

In passing it’s possibly worth noting the difference for BPR between trading & investment companies, particularly in the property sector. As one example, a trading company buys land, builds houses & sells them, & should qualify for BPR; whereas an investment company owns properties which it rents out & doesn’t qualify for BPR. There are of course many grey areas between the two which HMRC will consider when assessing an estate for IHT after death & no, they won’t give you a ruling beforehand as they will not consider “hypothetical” cases. There are however plenty of former HMRC tax inspectors now acting as freelance consultants who will doubtless give you an opinion for a suitable fee.

Alternative Investment Market (AIM). For completeness please note that following the recently announced changes to BPR, shares in companies quoted on AIM will also become subject to IHT from April 2026, when relief on qualifying AIM shares and portfolios will be cut from 100% to 50%.

Reform Guildford extends grateful thanks to Clive Hall (former Financial Planner, now retired, and current Chair of Reform-UK Reigate) for this excellent and highly informative article