Inheritance tax explained by Interactive Investor expert
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New data from HM Revenue and Customs (HMRC) has revealed that inheritance tax receipts soared to £5.5billion from April 2021 to February 2022. This was yet another increase in the number of IHT receipts reported in the UK, up from £0.7billion year-on-year. Do you think your family could be hit with a huge bill once a loved one dies? Vote in our poll.
IHT can be a huge worry for families with HMRC expected to raise an extra £10billion from the hated “death tax” over the next five years, up from £27billion over the previous five.
Last year, Chancellor Rishi Sunak froze the IHT threshold at £325,000 until at least 2026, with the nil-rate main residence band for family homes frozen at £175,000.
This will steadily drag more families into the net, as house prices and stock markets rise.
IHT is only paid where a person dies and has an estate valued above £325,000.
Where IHT is due, it will be levied at 40 percent on the parts of the estate valued over the £325,000 threshold.
So, for instance, if an estate is valued at £400,000, 40 percent would typically be charged on £75,000 worth of the assets.
Some 33,000 estates paid IHT, with the average bill coming to around £160,000, according to the Office for Budget Responsibility (OBR).
Many households have benefited from tax breaks on their main home when passing it on to a direct descendent, known as the “main residence nil rate band”, or “family home allowance”.
As it stands, this is currently £175,000 and married couples or civil partners can share the allowance.
Introduced in 2017, the allowance allows married couples to pass on estates of up to £1million to direct descendants, including a family home.
Rishi Sunak has also frozen income tax, the pensions lifetime allowance and capital gains tax thresholds until at least April 2026.
Freezing tax in this way is tax by stealth because it increases the amount that HMRC receives each year without people realising it.
Do you think your family will be hit by inheritance tax? Do you think the threshold should continue to be frozen until 2026? Have your say by voting in our poll and leaving a comment below.
Personal tax expert, Christine Cairns, estimates that if the IHT band threshold had followed inflation trends each year since 2009, it would have reached over £478,000.
This is more than £153,000, which could have been passed onto families tax free and means that a grieving family paying IHT at 40 percent, will pay an additional £61,231 to HMRC because of the freeze.
So, how can you avoid paying IHT as the net creeps ever wider?
- Reducing your estate through gifts
An outright gift is one of the simplest ways to reduce an estate, for example, giving an adult child or grandchild a deposit for a house.
Such gifts are potentially exempt transfers (known as PETs) and so may be chargeable to IHT if you die within seven years of the gift. This is known as the “seven-year clock”.
When making gifts, each person can give away £3,000 a year which is immediately exempt and not on the seven-year clock.
- Ensuring your Will is tax efficient
Not all Wills will help to save IHT but having a Will drafted by a solicitor will ensure that the IHT implications of the structure of the Will are properly considered and dovetail neatly with the lifetime estate planning that you have put into place.
For example, a solicitor can advise on the most tax efficient way to provide for an unmarried partner or how to preserve Business Relief which would otherwise be lost if the whole estate is left to a spouse or civil partner.
- Gifting to charities
Britons can gift to charities as they can provide relief which can reduce an individual’s income tax liability.
Gifts to qualifying charities are also exempt from inheritance tax and if an individual leaves broadly 10 percent of their estate to charity in their Will, their estate would only suffer a 36 percent inheritance tax rate, rather than the usual 40 percent.
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