By Daniel Hough

Earlier this year, Chancellor Rishi Sunak delivered his Budget announcement with a reasonably mixed bag of news for savers and

no major differences announced to the tax system. Among the changes, or lack thereof, however, were included a freeze to the inheritance tax (IHT) threshold, set to remain in place for the next five years.

While this might not seem like a measure that needs immediate attention, without proper financial planning and consideration of the impact of the freeze, there is a risk people could end up exceeding the allowances over the next few years.

In July 2021 alone, £570 million was paid in IHT, which is the highest ever amount for a single month since HM Revenue and Customs records began.

This was partly driven by an increase in estates being liable for IHT after a year of record house-price increases and the ongoing stock market recovery. Coupled with the freeze, taxpayers are potentially facing record bills in the years to come that could catch them out.

Echoing the trend, a record £2 billion in inheritance tax was paid between April to July 2021, according to data released last month1.

The Covid-19 influence remains to be seen and HMRC said it was too soon to say whether the pandemic had led to families making additional transfers of wealth over the last year.

The most recent figures released for the 2018/19 tax year showed 1,190 people in Scotland contributed to an overall inheritance tax bill totalling £233m – an average of £195,798.32 each.

Across the UK, the average payment was up 6 per cent on the previous financial year and that pattern could be set to continue.

There are two IHT allowances now frozen until the start of the 2026 tax year: the nil-rate band of £325,000 – which was set in April 2009; and the residence nil-rate band of £175,000. While these allowances seem generous, any significant or even moderate growth in an estate’s value could begin to cause issues without families realising.

For example, an estate valued at £750,000 just now – which would not exceed the nil-rate band for a married couple – could realistically grow to £957,000 over the next five years, based on a 5% annual growth rate.

Early planning is going to be key to navigating future IHT liabilities. If you think there could be an issue with your estate, start by getting an overview and seeking professional advice from both a financial planning team and a tax specialist.

There are a number of options and measures to consider as part of a financial plan, but it will depend on individual circumstances as to what the best route forward might entail.

However, to begin with, estimating your potential future growth will help to give you an overview of your current situation.

Depending on the risk profile of your investments, you could use a benchmark figure as an estimation and, if you have property investments, you could look at recent sales of similar property in the same neighbourhood or instruct a formal valuation.

It is important to remember this estimation will only act as a guide – property markets and share prices can be volatile and unpredictable. We have seen that first-hand over the last 18 months or so.

Together with a financial planner you might decide to go down the route of gifting, investing in specific products that offer relief, setting up a trust, alternative investments or simply ensuring you maximise all annual exemptions.

However, there are different risk profiles to consider, and these options may not necessarily be suitable for all.

The important thing is to start talking about IHT while there is an opportunity to get a plan in place and from there onwards, review your situation annually. The legislation could still change but based on the current timeline of the freeze, there is a risk that your family could be hit with a significant unexpected bill.

IHT might not impact you now, but it could become a serious factor in the future if left forgotten about.

Daniel Hough is a financial planner at Brewin Dolphin.