Financial Planning

How to navigate inheritance tax in 2022

How to navigate inheritance tax in 2022

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult an independent financial adviser.

Liz Truss, one of the two remaining Conservative leadership (and Prime Minister) candidates, has promised a review of inheritance tax (IHT) – possibly axing it for good, if she wins. Yet what changes could she make? What is the state of the IHT landscape, currently? Below, our team outlines some key principles to an estate plan in 2022-23. We also include some ideas about how IHT could change in the future. We hope this is helpful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:

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IHT at a glance

Inheritance tax (IHT) is typically levied at 40% on the value of an individual’s estate once it exceeds £325,000. For instance, if your estate is worth £500,000 when you die (assuming you do not qualify for any exemptions), then £125,000 will be taxed at 40% – resulting in a bill of £50,000. However, the IHT system in the UK is more complex than this might suggest.

First of all, spouses can pass any unused IHT allowance between them, tax-free, when one of them dies. For example, suppose a husband dies and specifies in his will that he wants everything he owns to go to his wife. She will then “inherit” his £325,000 IHT-free allowance and can effectively combine it with her own. When she eventually dies, therefore, she could pass down £650,000 to her beneficiaries without her estate paying IHT.

Secondly, certain IHT exemptions (or threshold “extensions”) can apply to the calculations when working out how much tax is due. In particular, the residence nil rate band (RNRB) allows an individual to hand down an additional £175,000 to “direct descendants” (such as children) when the family home to passed down to them. In effect, this could allow an individual to pass down £500,000 without IHT. A married couple or civil partnership, moreover, could pass down £1m.


How might inheritance tax change?

Liz Truss has stated that she would like to review IHT, which she sees as a tax on hard-working people after a lifetime of taxes. The radical option, of course, would be to abolish it altogether. However, given that IHT brought in £6.1bn in 2021-22, this may be a difficult policy whilst the UK struggles to balance the books after the Covid pandemic (and, currently, with inflation and interest rates running high).

Alternatively, whoever wins the leadership contest might bring in a one-off wealth tax. This was suggested by the Wealth Tax Commission (established in 2020), and could raise £80bn for the Treasury; a huge sum roughly equivalent to the UK’s spending on transport, public order and safety and government debt interest. However, this would require a massive overhaul of the UK tax system and would likely provide unpopular with the Conservative core voting base.

There are other options  for the new Prime Minister, including:

  • Cutting the 40% rate to something lower. This could work as a tiered system, but would make the UK’s already complex tax system even more so. A flat cut across the board would be pounced on by the opposition, making it difficult politically.
  • Raise the threshold. This seems more likely and less expensive in political capital, taking lots of pressure off homeowners caught in the “property IHT trap”.
  • Introduce a gift tax. Here, you would have a “cap” on how much you can give away in your lifetime rather, like the system in the USA. This could be seen as quite a controversial change, however.
  • Make more assets free from IHT. Currently, pension pots fall outside the value of your estate for IHT purposes. The new Prime Minister could extend the list of exempt assets (e.g. ISA savings). This would be a farily straightforward move.


How should I approach my IHT plan?

Naturally, your estate will be highly unique after a lifetime of building up wealth (possibly with a partner/spouse) through your job and other income streams. This means that every estate plan needs to be tailored to the specific goals and situation of each person, or couple. Here, financial advice can be tremendously helpful. An expert can help you gain a clearer of the current tax landscape, how it might change and some of the different paths you might take.

Naturally, it will be sensible to take advantage of an appropriate range of IHT allowances to rid your estate of needless IHT liability. For instance, remember that pension pots can be handed down to beneficiaries without facing IHT in 2022-23. Here, it can be wise to concentrate your retirement savings into pensions rather than in a general investment account (GIA), regular savings account or ISA, which generally cannot be inherited tax-free. However, you would need to be careful not to fall foul of certain “traps” – such as exceeding the “lifetime allowance” (i.e. the total you can save into your pension(s) without getting taxed on the withdrawals).



Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:

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