Inheritance tax: How you could cut tax liability by 100 percent

Inheritance tax labelled ‘unfair’ and ‘cruel’ by expert

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Under current Government plans, the inheritance tax threshold will remain frozen until 2026 and under the freeze, families pay a tax of up to 40 percent on the value of an estate above the current threshold of £325,000. If the estate’s value is below the threshold then a person does not have to pay any inheritance tax. The reasons for the increase in the takings have been put down to the continuing booming property prices amid the freeze.

Without reform to the tax, the Office for Budget Responsibility (OBR) forecasts that as many as 6.5 percent of estates could be liable for inheritance tax by 2026. 

This is over double the 3.7 percent of estates which were pulled into the tax in the last financial year. 

There are ways that people can use the current inheritance tax rules to their advantage so they don’t leave their loved ones with a massive tax bill after they pass. 

Properties are usually the biggest asset a person has and can usually take up the majority of the threshold.

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However, Britons are able to pass on their home, free from inheritance tax, to their spouse or civil partner when they die.

They can also increase the tax-free threshold to £500,000 if they gift it to their children or grandchildren. Children who are adopted, fostered or stepchildren also fall into this category. 

It means some can increase the threshold to up to £1million.

However, the person must own, or own a share, in the property.

The estate also must be worth less than £2million.

If Britons want to leave their house to anyone else, this will count towards the value of their estate.

In other areas, people can reduce the value of their estate by gifting whilst they are still alive. 

However, not all gifts a person makes will be free from tax. Some gifts can be classed as a potentially exempt transfer or a chargeable lifetime transfer for inheritance tax purposes.

According to the rules, all adults can give away a maximum of £3,000 every year without paying tax on it. This is known as a person’s “annual exemption”.

The £3,000 can be to one person or be split between several.

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Couples can combine their allowances which means they can give away £6,000 without incurring any tax. 

Britons may also carry over their unused annual exemption to the next year, however, this can only be done for one tax year. 

People can give as many gifts of up to £250 per person as they want each tax year, as long as they have not benefited from the £3,000 limit.

Birthday and Christmas gifts which are given from a person’s regular income are also exempt from inheritance tax.

Parents can gift their children £5,000 when they are getting married, they can gift £2,500 to a grandchild or great-grandchild upon marriage, and £1,000 to another relative or friend.

People can also make regular payments to help with another person’s living costs, known as “normal expenditure out of income” however, this can not affect a person’s own standard of living.

With gifting, Britons do need to be wary of the seven-year rule. 

Gifts that are given within three years before death are sadly taxed at the full 40 percent. 

From three years, the amount taxed is set on a scale known as a “taper relief”. 

Between three to four years the gift is taxed at a rate of 32 percent, between four to five it is taxed at 24 percent, and if a person dies five to six years after the gift, it is taxed at 16 percent, and between six to seven years it is eight percent. 

The Government recommends that people keep a detailed record of what they give which includes a record of what was given, the value of the gift, and the date it was given. 

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