It’s our money. So how do we make sure relatives inherit — not the taxman?

WHEN I read the latest inheritance tax figures, words echoed your eyes.’George Harrison’s down the years: ‘Now my advice for those who die, declare the pennies on

Fifty-two years after he wrote Taxman for The Beatles, inheritance tax (IHT) receipts have soared to £5.23 billion, increasing 120 pc in eight years.

As the HMRC grim reapers scythe their way through more estates, it’s a reminder that we must invest tax-efficiently for both life and death.

I’ve always used pensions and Isas for their tax benefits, and Mrs H and I recently updated our wills to make sure anything we leave is handled efficiently.

IHT is a key consideration, because once it kicks in it is charged at a punishing 40 pc.

My philosophy is to spend as much as I can while I am still fit enough to enjoy it and have the faculties to remember it.

I’ve pointed out to my marvellous mother-in-law that, later in life, every £1 spent really only costs 60p — the other 40p is effectively in relief from IHT.

So if she spends £6 buying me coffee and cake, it is really costing her £3.60 with the other £2.40 being avoided IHT. If, on the other hand, I pick up the bill, that £6 comes out of my taxed income so, as a higher-rate taxpayer, I would have to earn £10 to pay for it. I’m not sure she’s entirely convinced.

The biggest problem with inheritance tax is that the basic starting point of £325,000 has not changed since 2009.

If it had risen with price inflation it would be £422,000, or, had it risen with house prices, closer to £550,000.

Those able to leave money to direct descendants such as children and grandchildren, whether they be yours, step or adopted ones, can leave an extra £125,000 from the value of their main residence tax-free. This allowance will be rising to £175,000 from April 6, 2020.

Spouses can combine their allowances, which will effectively give a £1million limit — though the extra allowance starts to be whittled away on estates of more than £2 million.

I have childless friends who are furious and, justifiably, feel they are being bizarrely punished. Nieces, nephews and godchildren don’t qualify for this bonus.

The Office of Tax Simplification is looking at how the tax could be changed. But, with the Government desperate to raise cash, don’t hold your breath.

For now, the best we ordinary folk can do is give away as much as we can afford to without leaving ourselves short.

As long as you live for seven years after making a gift, it falls out of the IHT net. It’s a great incentive for your children to pamper you for the best part of a decade . . .

You can also make regular gifts out of income if they don’t reduce your standard of living. So you could make a regular monthly contribution to your children or grandchildren’s pension, mortgage or education costs, knowing your money is helping to build their future.

Pensions are a precious option because they do not form part of your estate, so do not count towards your IHT allowance.

If you die before turning 75, the whole lot can be passed on taxfree, and taken tax-free, by your beneficiaries within two years.

If you die later, the money still passes tax-free, but the beneficiary will be taxed at their highest rate of income tax when they draw the money.

If you take a tax-free lump sum, that money immediately forms part of your estate.

Isas, on the other hand, are in your estate, so any money left in these will count towards your IHT allowance — though Isas can be inherited by a spouse with the tax benefits intact. So it may be better to take income from Isas initially.

Remember that all money passed to your spouse or civil partner goes without IHT.

If you’re making a gift to children, it could be better coming from the younger of you — or the one in best health. In other words, the one who you think is most likely to survive long enough to escape IHT . . .

Mrs H and I have willed our money to one another rather than waste allowance by making other gifts. The survivor can then make gifts and try to hang on for seven years. They will also have our combined IHT allowances for anything they’ve been foolish enough not to spend.

The exemptions remain frozen and withering. The best is probably the £5,000 we can give to our children when they marry — grandchildren can get £2,500.

There’s also a £3,000 annual allowance and a small gifts allowance, under which you can give £250 to any number of people — a few cases of wine for close friends, perhaps?

Life insurance products will, if correctly structured, pay out IHT-free on your death. That’s useful when you’re young and raising a family but for older people they are expensive; I wouldn’t touch them with a bargepole.

Let’s not forget it’s our money. Tax planning is all very well but if it leaves you unable to spend your savings when you need them, you’ve been sold a pup.