Does the Autumn Statement have a silver lining for inheritance tax savings in a recession

01 November 2022

The chancellor’s Autumn Statement will drag more estates into the inheritance tax (IHT) net following the further freezing of the IHT nil rate band and residence nil rate band until April 2028. Whilst the Treasury’s figures suggest a modest increase in IHT revenues of £35m as a result of this measure, this may be a conservative estimate based on predicted limited growth in equities and property prices over the next six years.

The current reality is that financial markets remain volatile and, whilst the Office of Budget Responsibility (OBR) forecasts a fall in property prices of 9% by September 2024, the IHT receipts published for October 2022 represent the highest on record for that month. The IHT receipts for the year to date show no sign of slowing down and have continued to rise to £4.1bn between April and October 2022.

The prospect of property prices dipping, or at least their growth slowing, may not be bad news for all. It presents an ideal opportunity to make gifts and support family and others in need, whilst reducing exposure to IHT of up to 40% of the value gifted. In a financial downturn, where some assets have fallen in value, the silver lining for taxpayers is the opportunity to pass assets in their lifetime whilst minimising IHT and CGT. Here are some IHT saving tips:

  • Making gifts of cash or assets to an individual will be completely exempt from IHT if the donor survives seven years from making the gift so the sooner the gifts are made the earlier the exemption clock starts to tick. Any IHT that is assessable on a gift will be based on the value of the asset when the gift is made, so it’s advantageous to consider this when values of assets are depressed. Gifts of assets may be subject to CGT so making gifts before 6 April 2023 may allow taxpayers to benefit from the current £12,300 CGT annual exemption before it is reduced to £6,000. In addition, assets which have fallen in value should minimise CGT exposure as CGT is only assessable on any profits realised. Gifting property that is mortgaged may result in the recipient of the gift incurring stamp duty land tax, or other similar property stamp taxes in Wales and Scotland, so care is needed here.
  • Pensioners benefitting from the triple lock guarantee but do not need the surplus income can make gifts from ‘normal income’, which will be immediately free from IHT so long as the gifts do not impact their living standards and are habitual. Records need to be kept. Taxpayers should always evaluate future spending requirements before making any gifts to ensure they retain a sufficient amount to live on.
  • Gifts of up to £325,000 or £650,000 for couples can potentially be made into a trust without an IHT charge arising (however other tax implications should be considered as set out above). Again, depressed property prices may make this an opportune time to settle assets in trusts. Trusts are an option where some control over the assets being gifted is desired, for example to provide for grandchildren. Beneficiaries of trusts can suffer higher effective income tax rates from trust income distributions than they would via outright ownership of some assets, so the assets held in trust need careful consideration.
  • Individuals with shareholdings in an investment company may be exposed to IHT on the value of their shares, unlike trading companies which generally benefit from IHT relief. The current economic climate may represent an appropriate time to consider planning to cap their IHT exposure by creating a new class of share entitled to future growth in the company. In the right circumstances, this can lead to any future growth in the investment company falling outside of the individual’s estate immediately.

It is easy to focus on the negatives from the country’s finances but with the appropriate planning now, there is a real opportunity for families to get ahead and limit their exposure to a further tax cost on death.