Inheritance tax warning as pensions can help minimise bill

Britons have been urged to review their pension savings as they can be a key element in reducing their inheritance tax (IHT) liability. A person inheriting assets has to pay the 40 percent tax on any total assets worth more than £325,000 for single people, or above £650,000 for couples.

There is an additional residence nil-rate band if a main home is being passed on to a person’s children or grandchildren, of £175,000 for single people and £350,000 for couples.

One way for a person to reduce their IHT liability is to invest in pensions, as they are not considered part of a person’s estate for inheritance tax purposes.

Stevie Heafford, tax partner at the accountancy firm HW Fisher, said Britons should prioritise using funds from their savings such as ISAs during their retirement, before using their pensions.

She also said people now have more leeway to save into pensions after a recent change in legislation.

She said: “In the recent Spring Statement, the Chancellor abolished the Lifetime Pensions Allowance and the annual cap on tax-free pensions contributions was increased to £60,000 a year.

“These changes have made pensions potentially even more valuable for IHT planning as you can pay more into your pension, and still have access to your funds should something unexpected happen.

“As always, the devil is in the detail so do seek advice in this regard and bear in mind the rules could change in the future.”

With rising house prices and inflation increasing the price of other assets, more Britons are being hit by the tax.

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When a person dies, the inheritor has until six months have ended from their death to pay the tax.

Ms Heafford warned people face larger penalties if they fail to pay the tax on time, saying: “From April 13, the rate of interest on overdue IHT increased from 6.50 percent to 6.75 percent – making it even more expensive to get this tax wrong.

“Once you have worked out what you can afford to give away, we’d recommend seeking professional advice.

“There are a number of possibilities and pitfalls in IHT planning and a professional is trained to evaluate the knock-on effects of other taxes – such as capital gains tax – which might be triggered by IHT planning.”

Capital gains tax applies to the increase in value of an asset, such as property, since it was purchased.

The threshold for paying capital gains tax has decreased going into this tax year, from £12,300 to £6,000.

A person can reduce their liability by reducing the size of their estate with gifts. An individual can give away up to £3,000 each tax year tax-free.

There is also the option to give away any number of gifts up to £250, to different people, during a tax year.

A person can give away a larger amount but they have to survive for seven years afterwards for the gift to avoid inheritance tax.

The amount of tax that applies to the amount reduces as the years progress towards the seven-year anniversary.

A person can also give away a tax-free gift to someone who is getting married or starting a civil partnership.

This includes up to £5,000 for a child, up to £2,500 for a grandchild or great-grandchild and up to £1,000 to any other individual.

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