Seven ‘legitimate’ tips to beat inheritance tax threshold

World News

Inheritance tax: Graham Southorn explains how trusts can help

We use your sign-up to provide content in ways you’ve consented to and to improve our understanding of you. This may include adverts from us and 3rd parties based on our understanding. You can unsubscribe at any time. More info

In a bid to fill the £50billion fiscal hole caused by the Conservative’s previous mini-budget, Chancellor Jeremy Hunt announced a raft of tax freezes and increases in November’s Autumn Statement. While the inheritance tax (IHT) threshold has remained the same since 2009, the freeze will now be extended until 2028 despite rising inflation – a 20-year stealth tax.

On the move, Mr Hunt told the House of Commons: “The fairest way to restore the public finances is to ask everyone to contribute a little, with those on the highest incomes and those making the highest profits paying a larger share.”

However, while UK inflation rates rocket and house prices surge, it’s argued this threshold is far too low and it’s hitting many households much harder.

Inheritance tax is applied to the estate, such as money, property and possessions, of a person who’s died and can land families with a sizeable bill to pay. Currently, the nil-rate band, which is the maximum threshold a person can inherit before having to pay IHT, has been frozen at £325,000. Once this threshold is reached, a 40 percent tax is applied to the remaining assets.

Alex Davies, CEO and founder of Wealth Club said: “Freezing the inheritance tax threshold for yet another two years – until April 2028 – is another kick in the teeth for those wanting to pass down their wealth to loved ones. We believe that this extended freeze combined with rampant inflation will increase average IHT bills to £297,793 in 2025/26 and to £336,605 in 2027/28.

“Contrary to what many think, inheritance tax doesn’t just affect the super-rich. It will be the thousands of hardworking families to bear the brunt, as they get caught in the crosshairs of high property prices and frozen IHT allowances.”

Figures released last month show that HMRC amassed a staggering £3.5billion in inheritance tax receipts in the six months to September 2022. This works out as £400million more than in the same period last year, continuing the upward trend.

Mark Collins, head of tax at Handelsbanken Wealth & Asset Management said: “The fact that IHT receipts are at an all-time high both in nominal terms and as a percentage of GDP underlines how important the tax is to the total Government tax take.

“Government forecasts indicate IHT receipts are set to rise to more than £6.7billion in the current tax year, which again underlines the importance of seeking advice and regularly reviewing your affairs to reduce your exposure to inheritance tax.”

Research from Handelsbanken Wealth & Asset Management shows, from who it surveyed around the country, people in Wales (32 percent) are most in favour of scrapping IHT, narrowly ahead of the South at 31 percent. Londoners are most in favour of increasing IHT compared with other regions, although it is still only 16 percent in favour. Overall, more than half (52 percent) want to see IHT scrapped or reduced.

Couples face 40% inheritance tax hit due to ‘common myth’ [INSIGHT]
Inheritance tax: How you can pass on wealth whilst still alive [EXPLAINED]
Economists warn of 200,000 Brits losing home in recession [ANALYSIS]

The good news is that with some careful planning there are lots of perfectly legitimate ways people can eliminate or keep IHT bills to the minimum.

Make a will

To remove some of the tax burdens, a good first step is to make a will. Mr Davies said: “Without it, your estate will be shared according to a set of pre-determined rules. That means the taxman might end up with more than their fair share.”

Use gift allowances

Every year, people can give up to £3,000 away tax-free. This is known as the annual exemption. If a person didn’t use it last year, they can combine it and pass on £6,000.

Mr Davies said: “You can also give up to £250 each year to however many people you wish – but only one gift per recipient per year – or make a wedding gift of up to £5,000 to your child; up to £2,500 to your grandchild; up to £2,500 to your spouse or civil partner to be and £1,000 to anyone else.

“Beyond these allowances, you can pass on as much as you like IHT-free. So long as you live for at least seven years after giving money away, there will be no IHT to pay.”

Make regular gifts

People can also make regular gifts from their income – of any amount – as long as they can demonstrate their standard of living has not been affected. These gifts are immediately IHT-free and there is no seven-year rule.

Verity Kirby, private client partner at law firm Shakespeare Martineau said: “Habitual gifts, paid from any excess income, without adversely affecting the standard of living of the individual making the gift, are also exempt from inheritance tax.

“This method of gifting needs to be carefully recorded as evidence will need to be provided to HMRC to prove the gifts were genuinely made out of excess income, in the event of the beneficiary dying within seven years.”

Give to charity

According to Mr Davies, if a person leaves at least 10 percent of their net estate to a charity or a few other organisations, they may be able to get a discount on the IHT rate. It could reduce to a 36 percent tax instead of 40 percent ­– on the rest of the estate.

Use the pension allowance

Pensions are not usually subject to IHT for those under 75 years old – they can be passed on tax efficiently and, in some cases, even tax-free.

Stevie Heafford, partner at accountancy firm HW Fisher said: “While ISAs give the opportunity for tax-free growth and income, they still fall within the taxable estate on death and are subject to inheritance tax at that point.

“So if you have a pension pot but also other investments, it makes sense to utilise the other investments to defray expenses during your lifetime (or even to make lifetime gifts) and leave the pension to be passed on tax-free on death.”

However, she notes: “There can be other tax charges associated with passing on pensions depending on the type of pension it is, how you are paid the pension and the age of the person who has died.

“For example, if you receive a lump sum payment and the owner of the pension was under the age of 75 when they died, you will usually pay no tax. If you receive a lump sum but the owner of the pension was over 75 when they died, you will usually be subject to income tax which will be deducted by the provider.”

Set up a trust

Trusts have traditionally been a staple of IHT planning. They can enable money to fall outside an estate if a person lives for at least seven years after establishing the trust.

Mr Davies said: “The related taxes and laws are complicated – you should seek specialist advice if you’re considering this.”

Invest in an AIM IHT ISA

ISAs are tax-free during a person’s lifetime but when they die, or when their spouse dies later, they could be subject to 40 percent IHT bill.

Mr Davies said: “An increasingly popular way of mitigating IHT on an ISA is to invest in certain AIM quoted companies which qualify for Business Property Relief (BPR). You must hold the shares for at least two years and if you still hold them on death you could potentially pass them on without a penny due in inheritance tax.”

Source: Read Full Article