Martin Roberts looks into the latest data on Inheritance Tax (IHT)

Although only about 4% of UK deaths result in a liability to IHT, there were still around 27,000 estates paying IHT in 2020/21. These naturally tend to be concentrated in the wealthier parts of the country and especially those where average property values are higher.

According to the latest published statistics, the Taxman took £5.76bn in IHT in the UK in 2020/21, and estates in the South East were the second biggest contributor to that figure after those in the London area. In fact, the South East contributed a fifth of the UK total - 4,990 estates in the South East paid a just over £1bn in IHT.

In the Sussex area, 176 of those estates paying IHT were in Brighton & Hove; 127 were in the Chichester area, 105 in Arundel and the South Downs, 89 in Lewes and 67 in Mid Sussex. In these five Sussex areas alone, 564 families paid a total of £131m in IHT, an average of over £230,000 per estate.

IHT is currently charged at 40% on assets (in excess of the threshold levels) which are transferred on death, including gifts made within seven years of death and gifts made to and assets contained in certain types of trusts.

There are IHT exemptions for transfers of assets between spouses and civil partners and for transfers to qualifying charities. There are also reliefs for Agricultural and Business Properties and also for Residences transferred to direct descendants.

As a result, most estates (over 95%) pay nothing as they fall below the threshold levels at which IHT kicks in, after applying allowances and reliefs. In fact, 81% of IHT in 2020/21 came from net paying estates valued at £1m or more, and these estates actually amounted to only 4.3% of all estates requiring a grant of representation.

Of course, as the age of the taxpayer increases, less of their wealth tends to be tied up in property, which can attract exemptions or reliefs, and more is held in cash and securities. So, the vast majority of IHT (82%) is paid on estates where the deceased is over 75.

It’s worth remembering that charitable donations to qualifying charities are tax free during your lifetime, and that if charitable donations are left in the will, they are taken off the value of the estate before IHT is applied.

In addition, if 10% or more of the taxable estate is left to charity, a reduced IHT rate will apply to the rest of your taxable estate not passing to charity. Currently, the normal IHT rate of 40% rate is reduced to 36%, saving 4% on the whole of the rest of the taxable estate.

As a result, any negative effect on non-charity beneficiaries is likely to be significantly reduced and, depending on the figures, the effect of the reduced IHT rate can sometimes mean that more is received by the eventual non-charity beneficiaries than would have been the case before the donation.

We always recommend those looking at their estate planning take qualified professional advice. In this case, if the estate is one of the 4.3% facing a potential IHT liability, taking early advise on all the reliefs and exemptions to IHT, including charitable donations to qualifying organisations like Sussex Community Foundation, might well be worthwhile.

At Sussex Community Foundation we make grants to local charities, groups and organisations to address specific needs in the community. Our donors’ and fundholders’ philanthropic effort make an enormous difference in the lives of many in Sussex. Read more about the stories and groups we support here.

Martin Roberts, Trustee