Financial expert on how to avoid leaving a big tax bill for your loved ones

A FINANCIAL advisor in Hinckley has urged residents to gen up on the inheritance tax (IHT) rules as more people are becoming eligible for the tax.

Darren Hopkins works at Richstone Park Financial Planning, based in the town, where house prices have shot up by some 15 per cent in recent years.

The 40 per cent tax applies to anything worth more than £325,000, or £650,000 for married couples, that is inherited when a friend or relative dies, with the threshold frozen until at least 2026.

There is also a residence nil-rate band, allowing a further £175,000, as long as the residential property is left to direct descendants.

Mr Hopkins said: “House prices have increased so much. The tax was set up for wealthy people.

“Now the man on the street is being put into the bracket. It’s always good to learn about it. People have a basic understanding but don’t know the details.”

Fortunately there are several ways you can be savvy with your money to avoid leaving a large tax bill for your loved ones.

Certain gifts are exempt from IHT, such as gifts between spouses and civil partners, to charities or political parties.

You can also make exempt donations that will be of national benefit, such as to museums or universities, and can give away up to £3,000 each tax year, up to £250 to any number of people, as well as regular gifts from your income.

According to Mr Hopkins, another type of IHT-exempt gift that people often overlook is gifts to someone who is getting married or creating a civil partnership.

In this regard, you can give up to £5,000 to a parent, £2,500 to your grandparents or £1,000 to anyone else.

You can also make a potentially exempt transfer (PET), a gift of an unlimited amount, but you have to survive seven years from the date of the gift to avoid IHT.

However, if there is a death before the seven years finish, the gift may not be charged the full 40 per cent IHT rate, as the rate decreases in stages after the third year.

Inherited pensions can be passed on tax free if the individual dies before they are 75. If they die afterwards, there may be a marginal rate of income tax to pay.

The money in your pension is not part of your will, so you will need to tell your provider who you would like to pass it on to.

Many people who have retired focus on spending their savings first before moving to their pension, so they can pass on their pension and avoid IHT.

If you are expecting an IHT bill, the deadline to pay the money is by the end of the sixth month after the person has died.