Last year, £5.32 billion of inheritance tax was paid to the Government – and this figure looks set to rise as the Chancellor looks for ways to pay for the COVID-19 pandemic. Inheritance Tax will have to be increased in some form, experts warn as the Chancellor looks set to make some significant changes over the next few months. With property prices rising, more and more people are being ‘caught in the net’ and being pushed over the £325,000 IHT tax threshold but there are some things people can put in place to make sure their loved ones pay less in tax.
Inheritance Tax is a tax on the property, money and possessions of someone who’s died and this year the Chancellor froze it in his Budget.
However because Rishi Sunak didn’t increase the allowance in line with inflation – some people could end up leaving their loved ones an unexpected IHT bill.
Currently, the two allowances are:
1. The nil-rate band: The nil-rate band is £325,000. IHT may be due if the entire value of someone’s estate, which includes all assets, exceeds this amount.
2. The residence nil-rate band: If an individual is leaving their main home to children or grandchildren, they can benefit from an additional £175,000 allowance.
However, it is possible to save a huge chunk of money on Inheritance Tax by making the most of gifts and trust funds.
Writing for What Investment, Charles Calkin of James Hambro & Partners,stated: “In practice, there are many different ways to reduce the value of your estate so that when it is passed on to your heirs, the IHT bill is reduced or non-existent.
“For example, you can make lots of small gifts with no IHT implications at all, while larger gifts are usually ‘potentially exempt transfers’ (PETs).
The value of these PETs falls out of your estate as long as you live for at least seven years after making them.”
To avoid paying the full 40 percent, property or assets can be given as gifts when the person is still alive, although it could still be taxed after they die.
That’s when something called ‘taper relief’ comes into effect which could mean the Inheritance Tax charged on the gift is less than 40 percent.
People you give gifts to might still have to pay Inheritance Tax, but only if you give away more than £325,000 and die within seven years.
The Government website states: “Other reliefs, such as Business Relief, allow some assets to be passed on free of Inheritance Tax or with a reduced bill.
“Your beneficiaries (the people who inherit your estate) do not normally pay tax on things they inherit. They may have related taxes to pay, for example if they get rental income from a house left to them in a will.”
It’s a complicated subject so people are advised to contact a solicitor or tax advisor.
A solicitor or advisor can also talk to HM Revenue and Customs (HMRC) on someone’s behalf if they give them permission.
Alternatively the Government advises people to seek help from the Society of Trust and Estate Practitioners.