IHT receipts to double to £15bn in less than a decade – will your estate be exposed?
Over £100 billion is reportedly transferred in inheritance and gifts in the UK each year – with the value of bequests in England set to double by 2040.
This could be a great boon for the Treasury – especially if estate values continue to rise with inflation and tax thresholds remain frozen.
It’s no surprise that inheritance tax (IHT) receipts hit a record high for the third year in a row in the 12 months to March 2024, raking in £7.5 billion – and the signs are for a continued upward trajectory. The Institute for Fiscal Studies (IFS) forecasts the growing levels of wealth held by older generations could mean IHT revenues will reach £15 billion by 2032/33.
Meanwhile, more estates are being pulled over the threshold into IHT liability – that is to say, more families could be facing that bill.
There have long been calls to abolish this controversial tax, but it’s anyone’s guess if this will ever come to pass – little enough has been said about it in the run-up to the general election.
Is your estate likely be exposed, and are you concerned about how inheritance tax may affect your loved ones? How could you pass on more of your wealth? This article looks at some options available to experienced investors under current rules – including making the most of your pension allowance.
Important: The information on this website is for experienced investors. It is not advice nor a research or personal recommendation to invest. If you’re unsure, please seek advice. Tax rules can change and benefits depend on circumstances Decisions should be based on investment merit, not tax reliefs alone.
Inheritance tax in a nutshell
Your loved ones, other than your spouse or civil partner, could typically face a 40% inheritance tax on assets you bequeath them over an allowed threshold.
If you are a single homeowner passing on assets to direct descendants, the tax-free threshold is up to £500,000 (£1 million if you’re married or in a civil partnership). This includes your £325,000 nil-rate band, plus £175,000 residence nil-rate band.
The residence nil-rate band is reduced £1 for every £2 for estates worth over £2 million; if your estate is worth £2.35 million you might lose it altogether.
There are various exemptions and reliefs available that can reduce the liability to the tax.
How might you pass on more of your wealth?
There are different ways experienced investors may be able to mitigate inheritance tax. In this article, we touch on three:
1. Pensions aren’t normally subject to IHT – are you making the most of this?
Pensions arguably provide the most generous tax reliefs available under current rules.
In brief: you could get up to 45% tax relief on the way in, tax-free growth whilst your money is invested and up to 25% tax-free cash when you take money out. Furthermore, pensions are not typically subject to inheritance tax.
So, if you are concerned about IHT, and you are eligible, it could be prudent to tuck away as much as you can into your pension.
And now there is a greater opportunity for more investors to do this: the annual allowance has increased to £60k. What’s more, there’s no longer a cap on the total you can invest in a pension over time, after the abolition of the lifetime allowance – that said, the government has introduced a new allowance to limit the amount that can be taken tax free from pensions as a lump sum. You can read more on pension tax relief and allowances in our article and factsheets.
Pensions are long-term investments: you cannot normally access your funds before age 55 (57 from 2028).
Investment ideas for your pension
Having contributed to a pension, the next question might be: where to invest?
We have two ready-made investment ideas for you to consider: the Quality Shares Portfolio and the Wealth Club Portfolio Service. Both are specifically designed for wealthier and more experienced investors, and are exclusive to Wealth Club. You choose which portfolio might be right for you and we manage it for you – this is not personal investment advice.
Note: these discretionary managed portfolios are long-term investments which can fall as well as rise in value and returns are not guaranteed. Currently, these two ideas are not available if you are in drawdown or intend to take benefits from the pension soon.
Quality Shares Portfolio – invest in “exceptional” companies, chosen for their resilience
This portfolio, managed by Wealth Club Head of Equities Charlie Huggins, is specifically designed for people who are genuinely interested in investing.
It currently invests in 15 companies Charlie considers exceptional. All are highly established industry leaders providing critical goods and services, with market capitalisations ranging from several billion dollars to over a trillion.
These companies are the type of businesses where you can bury the share certificate in a drawer, dig it out 10 years later and, hopefully, find the profits and cash flows are materially higher.
Once you invest, Charlie shares with you an unparalleled level of information. You can see a full list of every holding, with explanations on why it’s included. Every month, you receive a detailed update with views on the portfolio, companies, and market developments.
Wealth Club Portfolio Service – well-diversified, no-hassle portfolios: we do the legwork
These five portfolios are designed to provide experienced investors with a best-value, sensible long-term home for their wealth. They are the type of portfolio a private bank or wealth manager might build for you – but without the hefty price tag. In fact, you could pay around 40% less than you would if you used an adviser, and roughly the same if managing a typical fund portfolio yourself on a DIY platform.
Your portfolio is managed by an investment team previously responsible for hundreds of millions of pounds. They select, monitor and oversee all the investments: a diverse mix of 30–45 actively managed and low-cost index funds as well as investment trusts. They give you exposure to equities and bonds from around the world, but also infrastructure and other private assets – we are not aware of any similar service that can match this.
The portfolios include fund managers you might have already heard of – from Artemis to Fidelity and Fundsmith – as well as the likes of Brookfield, Comgest and Dodge & Cox: under-the-radar specialist investment firms.
2. Investing in BPR-qualifying businesses – IHT-free after two years
Business Property Relief was introduced in 1976 to allow family businesses to be passed down through generations free of IHT. Its scope later widened and today BPR is available for a range of assets – including certain private and AIM-quoted companies.
When you invest in such companies – directly or through a professionally managed portfolio – your investment should be inheritance tax free, provided you hold it at least two years and on death (and the investment remains qualifying).
There are different types of investments designed to deliver IHT relief, including:
AIM IHT ISAs
A typical portfolio will invest in around 20-40 AIM-quoted companies, usually in different sectors. The fund manager will aim to deliver some growth whilst trying to mitigate volatility. AIM portfolios are likely to be higher risk and more volatile than conventional Stocks & Shares ISAs. Read more on AIM IHT ISAs »
Forestry investment – if you are eligible
A forestry fund run by a professional manager allows investors to invest in commercial woodland. In addition to the potential for IHT relief after two years, as the trees grow, you could benefit from capital gains tax-free appreciation in the value of the timber (although not the value of the land) and no income tax liability on timber revenue. Because of the way forestry funds are structured, they are normally only open to very experienced or professional investors. Investors wishing to view specific fund information must first successfully complete a questionnaire designed to assess investment knowledge and experience – check to see if you qualify.
3. Other IHT-free options: EIS and SEIS
If you invest in EIS and SEIS it is worth remembering these should qualify for IHT relief under the BPR rules after two years of investment if you still hold them on death – part of the generous tax package they offer to temper the higher risks of investing in small young businesses.
EIS and SEIS should not be used exclusively as an IHT planning tool. EIS and SEIS are high risk and you could lose your capital.
What to do next?
Having been prudent enough to accrue wealth during your lifetime, you may not wish to have the taxman take up to 40p of every £1 you’ve worked hard to save over the years. Read our free factsheet to explore some of the options.
If you have any questions on the guide or another investment matter, please get in touch.
You can email us or call us on 0117 929 0511. We're open from 9am to 5.30pm Monday to Friday.
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.