How the 2023 Budget Affects Your Inheritance Tax Planning

15th August 2023

The 2023 Spring Budget brought with it a myriad of changes that could affect your personal finances, including Capital Gains Tax, pensions, and Inheritance Tax.

Specifically, the changes to Inheritance Tax include a freeze on the nil-rate band, residence nil-rate band, and agricultural relief.

Read on to find out the specifics of these changes and now they could affect you.


Estate Planning is a Crucial Part of Financial Management

Inheritance Tax is something that everyone needs to consider when it comes to their personal finances. Though it isn’t easy to think about, you will want to ensure that you leave as much as possible for your next of kin when you reach the end of your life, and that involves considering the current “nil-rate band” or NRB.

The NRB is the value of your estate that will be exempt from Inheritance Tax when you pass down your wealth to your next of kin. That number is £325,000 and it will remain at this amount until at least April of 2028 according to the announcement of the most recent budget.

If you own your primary residence and you choose to leave it to your direct descendants, which includes children or grandchildren (including adopted children), then you will qualify for the residence nil-rate band (RNRB).

The RNRB adds a further £175,000 onto the value of your estate that will be IHT free, meaning that you can leave up to £500,000 tax-free, and this has also been frozen until April 2028.

Furthermore, if you are married or in a civil partnership, then these tax allowances can be combined to total £1 million, which will be passed onto the surviving spouse.

It is important to understand that any part of your estate that goes above the tax-free threshold will be charged IHT, which currently sits at 40%. As such, these freezes are an important consideration for families over the next five years, especially given rising inflation rates and soaring property costs.


Why the Nil-Rate Band Freeze is Important

The standard NRB has been frozen at £325,000 since 2009, which is to say that it has remained the same for more than 14 years. The RNRB was introduced in in the 2017/18 tax year and started at £100,000, adding £25,000 each year until the 2020/21 tax year.

While that might seem fair, it is crucial to note that inflation has steadily increased over that time period, and £325,000 had significantly more buying power then than £325,000 would today.

Using the Bank of England inflation calculator, £325,000 in 2009 would be worth approximately £493,585 now – that is more than 1.5x the initial value!

That means that the value of your estate is steadily increasing, and the goods that you are purchasing are steadily rising in value, yet the NRB is not increasing alongside it. This essentially results in you paying IHT on more of your estate than you would have done in 2009.

It’s also worth remembering that your estate also includes the value of your home, which for many families, is their largest investment.

According to Statista, in January 2009, the average house price in the UK was £157,234. In January 2023, that figure was £288,289 – that’s almost 90% of the standard available NRB!

Currently, the value of your estate is rising due to inflation, but the NRB and the RNRB is not rising alongside it. With inflation rates still high and the NRB not set to change for at least 5 years, you will want to utilise estate planning services from a qualified tax advisor to ensure that you pay as little IHT as possible.


Other Changes to IHT in the 2023 Budget

Additional changes have been announced that will come into effect in the 2024/25 tax year to help with trust planning. Any income you earn from trusts up to the value of £500 will be disregarded on a tax basis, and the £1,000 basic rate band will be removed. Also, the need for some trusts to file tax returns will change in April 2024.

Furthermore, a major change has been announced for agricultural property relief that will take place in 2024, meaning it will be strictly limited to properties within UK borders. That means any agricultural property handed down through inheritance on the Isle of Man, Channel Islands, or in the European Economic Area will be treated the same as any other property outside the UK.


Get in Touch With Edwards to Help With Your Trusts and Estate Planning

Inheritance Tax and all the complications that come with it is not always an easy topic to understand and navigating it in the most tax-efficient way requires expert knowledge from tax advisors.

If you’re looking to receive trust planning help and top-quality tax advice in the midlands, get in touch with our team today!