Inheritance tax warning: ‘Middle-income families’ set to pay hefty bill – act now

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Inheritance tax explained by Interactive Investor expert

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Middle-income families are headed towards the 40 percent inheritance tax bracket as a result of rising property prices and the five-year freeze on IHT bands. The combination of these two elements mean unsuspecting individuals will find themselves pushed above the tax-free threshold. In fact, the Office for Budget Responsibility has predicted the number of additional people reaching the threshold will amount to more than 41,000 per annum by 2026.

As a result, many people will be hopeful to find ways to legally reduce their liability. 

Samantha Warner, Head of Product at, spoke exclusively to and shared some top tips to help Britons mitigate an inheritance tax bill.

Firstly, Ms Warner recommended transferring assets a person holds into a trust.

This is because they will not form part of the person’s death estate, thereby reducing the IHT liability.

A next point of action is to split out the residence nil-rate band (RNRB), a vital allowance for inheritance tax which relates to property.

Ms Warner explained: “If you split out the RNRB you can protect it for direct lineal descendants and the remainder of the estate can be put into a trust.

“This can help with tax planning in families – if a person puts their estate into a trust rather than leaving it directly, the family can benefit from the trust during their lifetime, but the assets will not form part of their death estates, and can contribute to keeping death estates of family members below the relevant tax thresholds. 

“Splitting out the RNRB enables that to be gifted directly, thereby taking advantage of the full value of this allowance wherever possible.”

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A third way a person may be able to mitigate their inheritance tax liability is through the process of lifetime gifts.

Lifetime gifts can help Britons to reduce the size of their estate on death, particularly if a system is set up, Ms Warner stated.

Gifts are generally exempt from IHT as long as a person survives the gift for seven years.

However, if the donor does not survive the seven year period, then the gift becomes known as a failed potentially exempt transfer. This means IHT is charged, albeit at a taper rate on a reducing scale.

Setting up a scheme to gift away some of the value of an estate is seen as a good way to insure against IHT liability.

Ms Warner also recommended Britons looking into the idea of leaving a part of their estate to charity upon their death.

The inheritance tax bill will not include anything a person decides they are leaving to charity.

This could be a win-win, allowing Britons to support a cause close to their hearts, while reducing the bill on their estate.

Ms Warner highlighted that leaving at least 10 percent of an estate to charity also has bonuses.

This is because the rule states if this is carried out, then the IHT rate on the remaining assets is reduced from 40 percent to 36 percent.

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Finally, the fifth tip for mitigating an inheritance tax bill relates to the use of flexible life interest trusts.

Ms Warner said: “Flexible life interest trusts allow a beneficiary to receive income from the trust for life.

“These trusts can be structured so that capital can also be gifted, reducing the size of the asset over the course of the life interest.”

Generally speaking, if a person is worried about inheritance tax or wishes to make decisions to reduce their bill, they are encouraged to consult experts.

This is particularly the case with more complex ideas surrounding tax planning, such as the use of trusts.

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