Shield your wealth from the record inheritance tax raid

Taxpayers were hit with a £6.1bn inheritance tax bill last year, up 14pc on 2020/21, according to HM Revenue & Customs. This is £1.3bn more than the previous tax year.

More families are being caught in this stealth tax raid as IHT thresholds have been frozen. They will remain capped until 2026 under government plans, forcing more and more into the trap. Andy Butcher, of wealth manager Raymond James, said: “By the time the frozen threshold is lifted, it’s predicted that the number of estates liable for IHT will have doubled from 2021.”

So how can you protect your finances?

GIVE AWAY GIFTS OF UP TO £3,000 TAX-FREE Everyone can give away small gifts, such as Christmas or birthday presents, worth up to £3,000 tax-free. This price cap is known as an annual exemption and can be carried forward to the following tax year, but only for one year.

Gifts can include wedding or civil ceremony presents of up to £ 1,000 per person (£ 2,500 for a grandchild or great- grandchild, and £5,000 for a child), payments to help with another person’s living costs, such as an elderly relative or a child under 18, and Christmas or birthday presents. The £3,000 limit also covers gifts to charities and political parties.

DOWNSIZE AND GIVE YOUR CHILDREN THE CASH

One of the main planks of inheritance tax is that it applies to assets you own at death – but it also applies to assets you have given away in the seven years before your death. This is to prevent “deathbed giving” as a way to avoid IHT.

Tax on assets above the tax- free threshold, which is £325,000 per person or twice that for married couples, £650,000, is applied at 40pc.

In April 2017, individuals were able to claim an additional allowance of £100,000 for the first time to offset the sale of a family home on death, on top of their existing £325,000 inheritance tax exemption. This allowance now stands at £175,000, allowing a couple to pass on £1m estates tax-free.

As a result, if you are planning to give away large assets such as property, or very large sums of cash resulting from the sale of property, you need to live on after the gift for seven years

in order for it to be free of tax. Within that seven-year period tax is applied at a sliding rate. Some have downsized at a younger age to free up to cash that could be given to children without paying inheritance tax.

You cannot give away an asset such as property and then continue to live in it without potentially running into “gift with reservation” rules. You would need either to pay market rent to the new owners (probably your children) or find somewhere else to live.

USE A DEED OF VARIATION TO PASS INHERITANCES ON TO YOUR CHILDREN

This is a useful trick that’s little understood and relatively unused. It involves the recipient of money or other assets in a will passing these assets straight on to another beneficiary. This usually works where the first recipient already owns assets worth more than the £325,000 (£650,000 for a married couple) taxfree threshold. In 2000, the tax-free allowance was £234,000 per person (rather than £325,000 as it is today) but crucially you could not add a married couple’s individual allowances together, applying both to the death of the second spouse.

That generous extension was introduced only in 2007.

INVEST IN ‘AIM’ SHARES AND OTHER IHT-PROOF ASSETS To encourage long-term investment in certain assets, the Government grants them exemption from inheritance tax. This has given rise to portfolios of IHT-proof assets being built, such as Aim shares, which are listed on the junior Alternative Investment Market in London. Not all Aim shares escape IHT and companies qualify only if they meet certain criteria.

STUFF YOUR PENSION FULL OF CASH – BUT DON’T SPEND IT This is easier said than done, but it’s worth knowing about. Money inside a pension can be bequeathed IHT-free.

But there are likely to be other tax consequences ( such as capital gains tax on the sale of your investments). And the maximum amount you can save into a pension tax- free is also now reduced to just over £1m – so this method has its limitations.