Throughout our lifetime we pay taxes on absolutely everything such as income tax on our salary, value added tax (VAT) on shopping, meals out and household bills, and Vehicle Excise Duty (road tax) on our vehicles.
And when we die, should the value of everything we own (our estate) exceed the inheritance tax allowance (threshold), then the controversial ‘death tax’ - officially known as ‘inheritance tax’ (IHT) - will be charged on any estate proceeds above the IHT threshold.
What is the Inheritance tax threshold 2022?
The inheritance tax allowance 2021 was £325,000 and this has not changed meaning the inheritance tax threshold 2022 (and 2023) remains exactly the same: £325,000.
To clarify, for the tax year 2022/23 you will (or rather the executors of your estate will) continue to pay tax at the rate of 40% on any estate proceeds exceeding the £325,000 tax threshold.
The good news is the IHT threshold will remain frozen until at least the year 2026 and there are still measures you can take to reduce your IHT liability with the help of a legal professional.
Note: The ‘IHT threshold’ is also known as the ‘Nil Rate Band’ but means exactly the same thing - you pay no tax on an estate that is valued at less than the IHT threshold (Nil Rate Band) of £325,000 and both terms can be used interchangeably.
There is an additional inheritance tax relief called a ‘Residence Nil Rate Band’ (RNRB) relating to the inheritance of property by direct descendants of the deceased - more on this below.
Read more: How to avoid paying inheritance tax UK
Inheritance tax news 2022/23: What’s changed?
Whilst the IHT threshold remains the same, there are some inheritance tax changes for the tax year 2022/23 that have been introduced to simplify and modernise the IHT process.
There are two major tax changes in relation to inheritance tax administration, specifically IHT reporting and the definition of a ‘spouse’ in IHT law:
Change #1: IHT reporting
Historically, executors or administrators of an estate have had to complete and submit lengthy and complex IHT forms, whether or not IHT was payable on an estate.
Following a review of the IHT process by the Office of Tax Simplification (OTS), the OTS made various recommendations that the government should implement to streamline the IHT reporting methods for estate administration.
The OTS recommended that probate applications should be wholly digitalised so that the entire probate process - including IHT form submission - can be dealt with online. However, the UK government has not yet agreed to implement this suggestion but they have agreed, in the meantime, to simplify the IHT reporting process.
Changes to the IHT rules, introduced in January 2022, mean:
- It is no longer compulsory for estate executors or administrators to report or file paperwork on estates that fall below the £325,000 allowance
- That original inked signatures are no longer necessary on IHT returns for any estate or trust issues that arise. This measure was initially introduced during the height of the covid pandemic to make IHT applications and submissions quicker and easier but was made a permanent measure in January 2022.
Change #2: New definition for ‘spouses’
The second change introduced in January 2022 relates to HMRC guidance on spouses to clarify exactly what a ‘spouse’ can mean.
Prior to this change, civil partners were not equally defined as ‘spouses’ in relation to inheritance tax rules which allows spouses to transfer unused IHT liability to avoid their estates being heavily taxed.
Under IHT law, HMRC’s new [modernised] definition for ‘spouses’ means:
- couples legally married to each other including couples of the same gender (same sex couples)
- couples officially registered as being ‘civil partners’
- couples who are still married in the eyes of the law (i.e. a Decree Absolute has not been issued officially and legally ending a marriage) however a couple have been separated at the date of death
- people who form part of a legally recognised polygamous marriage (where there can be three or more spouses)
Cohabiting partners (sometimes unofficially referred to as common-law partners) are not defined as ‘spouses’ under IHT law, regardless of how long they have been living together.
If you are a cohabiting partner, this means that you could lose out on potentially massive IHT savings equating to thousands of pounds, should you never marry your common-law partner.
Only HMRC-officially-recognised ‘spouses’ (as outlined above) can transfer any unused Nil Rate Band allowance to their surviving spouse on their death, which allowance can then be used to offset IHT payable on the surviving spouse’s estate when they die.
In addition, married couples with children might be entitled to apply for a further IHT allowance known as the ‘Residence Nil Rate Band’.
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What is the Residence Nil Rate Band?
As alluded to above, there is an additional IHT allowance called the ‘Residence Nil Rate Band’ (RNRB) that allows surviving spouses who directly bequeath (gift) a property in their Will to their direct descendants.
However, as is usual with probate related procedures, the application of a RNRB isn’t completely straightforward and whether or not you qualify for this additional relief and how much the relief is will depend on:
- The deceased leaving a residential property (that they lived in) directly to lineal descendants in their Will - this includes children, grandchildren, stepchildren, adopted or foster children.
- To be eligible for RNRB relief, the deceased must have died during the tax year 2017/18 (or later) when the RNRB was first introduced at £100,000.
- Calculation of the RNRB allowance is based on what the RNRB rate was on the date the deceased died. In the year 2022, this is currently £175,000 and will remain at this rate until the tax year 2025/26. If you have access to copies of IHT forms IHT400, IHT435 or IHT436, you can calculate the RNRB on the government’s website by using their online calculator.
- Any death that occurs from 2022 up to the tax year 2025/26 is entitled to a maximum total tax-free [individual] allowance of half a million pounds (£500,000). [IHT Nil Rate Band threshold of £325,000 + £175,000 Residence Nil Rate Band.] However, if you’re a spouse with children, the total maximum tax-free allowance is potentially double that: £1 million. [2 x IHT threshold of £325,000 = £650,000 + 2 x RNRB allowance of £175,000 = £350,000. And £650,000 + £350,000 = £1 million.]
- If the deceased set up a trust, this can affect the RNRB rule relating to descendants directly inheriting a property and if a property is left in trust, this will mean a property is not directly inherited and so the RNRB relief cannot be claimed for.
As Inheritance Tax law is complex but can avoid hefty 40 per cent IHT liabilities on your estate and potentially decimate your family’s inheritance, it’s important that you carefully plan for and consider IHT implications when you write your Will.
You should always seek legal advice from qualified experts before writing a Will and avoid using homemade Will kits if you want to protect your loved one(s)’ inheritance.
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Should you wish to speak to one of our legal advisors, simply fill in our online contact form and one of our helpful legal representatives will call you back to have a no-obligation chat about how we can help you plan for the future.
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