Inheritance tax: ‘Efficient and effective’ way to pass your savings & assets to loved ones

Inheritance tax explained by Interactive Investor expert

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Fortunately, there are ways to avoid passing on a large bill to loved ones including reducing wealth through gifts. Liz Ritchie, partner at accounting firm Mazars, has recommended gifts as an “efficient and effective way” to reduce the size of an estate.

A person can give away up to £3,000 each tax year, up to £250 to any number of people, as well as regular gifts from income.

Ms Ritchie said: “If you have a larger disposable income you might want to consider whether they might qualify for the normal expenditure out of income exemption which has no limit.

“Larger lifetime gifts can also be made but they do come with some rules.”

A person can make a gift of any amount on top of the aforementioned examples but if they die within seven years of making the gift, then some or all of the gift could be hit by IHT.

After three years from the making of the gift, the IHT rate decreases in stages until the seven years are up, so the gift may not be charged the full 40  rate.

Ms Ritchie warned that IHT is not something that people can simply deal with one time and then forget about it.

She said: “Inheritance tax planning isn’t something that can be looked at once and ticked off the to-do list.

“IHT allowances have been frozen by the treasury until 2026 but the same can’t be said for the value of people’s assets.

“For example, house prices have gone up and up in the last 18 months and could mean thousands more homeowners are dragged into paying tax on their estates in the next four years.

“To make sure you are making the most of your allowances, they must be reviewed regularly with your tax adviser.”

She also recommended consulting a financial adviser about assets.

The financial expert said: “It is also important to work with a financial adviser, one that you trust and feel has your best interests at heart, to make sure you are using allowances efficiently and that you feel confident about your financial situation.”

IHT applies to anything worth more than £325,000, or £650,000 for married couples, that is inherited when a friend or relative dies.

The sweeping tax applies to many different types of assets, including properties, savings, investments and ISAs, and vehicles and personal possessions.

Ms Ritchie said: “The list is extensive, and it can quickly add up.

“With the allowance frozen until 2026, this could mean more people are subject to the tax as things like houses increase in worth and investments grow.

“Calculate the value of your estate and the assets that you own that would be liable to inheritance tax as they are now.

“This gives your baseline to start planning around and a steer of what your potential IHT bill might be.”

IHT must be paid within six months of a death.

It is possible to get an IHT refund if the value of  assets  by the time an executor comes to sell an individual’s property or shares.

Some 22,000 Britons have claimed some money back from their IHT bill.

Refunds are not automatic and have to be applied for by an individual.

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