ACT NOW TO BEAT THE INHERITANCE TAX TRAP

BRITONS have to battle harder than ever to avoid inheritance tax as it takes a growing chunk of our wealth.

Families are rushing to seek advice from specialist advisers to avoid the hated tax and secure their loved ones’ financial future, according to new research from insurer Prudential.

More ordinary families are now being caught in the inheritance tax (IHT) trap, with receipts forecast to hit a record high of £4.6billion in the 2015/16 tax year, according to figures from the Office for National Statistics.

That is a leap of 21 per cent on the previous year’s £3.8billion, as rising property prices drag more homeowners into the IHT trap, particularly in London and the South-east.

The numbers will rise with the IHT “nil-rate band” frozen until 2021 at today’s £325,000, or £650,000 for married couples. Assets above that amount, including your home, may be taxed at a whopping 40 per cent.

Growing numbers are seeking financial advice to escape the tax sting, with more than half of advisers expecting demand for IHT help to rise again over the next year, Prudential reports.

Les Cameron, tax specialist at Prudential, said IHT receipts are swelling government coffers: “We are seeing an increase in the number of estates that are now liable for this tax. In basic terms, more families are paying more.”

The rush for advice has also been driven by families looking to take advantage of new rules that mean pension pots are no longer subject to IHT, following former Chancellor George Osborne’s move to abolish the pensions “death tax”.

People who die before age 75 can now pass on untouched pension funds free of tax, whereas previously their families could face a 55 per cent charge.

If they die after age 75 beneficiaries will pay income tax on the pension, according to their tax bracket.

Although married couples and civil partners can inherit each other’s individual savings accounts (ISAs), money in the tax-efficient savings vehicle will eventually become liable to IHT.

Andrew Tully, pensions technical director at advisers Retirement Advantage, said: “If IHT is a concern, spend your ISA savings first while keeping your pension invested in income drawdown.”

A new transferable IHT allowance will be phased in over four years from 2017/18, which ultimately will be worth £175,000 for parents who leave their main home to their children and grandchildren. That effectively lifts the IHT nil-rate band from £325,000 to £500,000 per parent or £1million for married couples, giving some relief.

If you fear a large IHT bill you cannot escape by giving away your property and other assets shortly before you die. It only becomes totally free of tax if you live for another seven years after making the gift.

Sean McCann, chartered financial planner at NFU Mutual, said everyone can gift up to £3,000 a year with instant IHT exemption, or £6,000 for couples.

“If you didn’t use last year’s allowance you can mop it up this year.”

You can make wedding gifts free of IHT too.

The happy couple’s parents can gift up to £5,000 in cash each and grandparents can gift up to £2,500 each.

Anyone else can give up to £1,000, McCann said.