Beat the hated death tax
FAMILIES are being told to double down on their inheritance tax planning as Chancellor Rishi Sunak’s five-year tax freeze sends bills soaring.
Yesterday’s figures from HM Revenue & Customs showed IHT receipts jumping by £700million in the year to March 2022, to hit a staggering £6.1billion.
The Office for Budget Responsibility has warned IHT bills will total a staggering £37billion over the next five years, after Sunak froze the IHT allowance at £325,000 until 2026 at least in last year’s Budget. Now is the time for families to take action, said Julia Rosenbloom, tax partner at Tilney Smith &Williamson.
She said growing numbers are having to sell family homes to settle IHT bills but added: “They may cut or eliminate their IHT bill by investing tax-efficiently and making gifts.”
Aegon pensions director Steve Cameron said families have a secret weapon at their disposal, in the shape of their pension.
“Currently, funds held within most pensions fall outside your estate for IHT purposes, whereas many other investments, including Isas, do not,” Cameron said.
If you die before age 75, your pensions can usually be passed on free of tax, although beneficiaries may pay tax on the proceeds if you die later.
Rosie Hooper, Quilter chartered financial planner, said Britons with modest properties risk being caught out by IHT, as the average asking price is now £360,101, according to Rightmove. “More and more will be dragged into the IHT net following the sale of their homes,” she said.
In theory, families may be able to pass on £1million worth of assets, if both partners use their £325,000 allowances, plus the £175,000 nil-rate main residence allowance.
However Hooper said the latter only applies when passing on a property to direct descendants: “The UK’s six million cohabitees cannot claim the combined allowances.”
She urged people to reduce their inheritance tax exposure by gifting to family members. “Each tax year, you can give away up to £3,000 worth of gifts IHT-free, so a couple could gift £6,000 a year,” Hooper said.
You can also give unlimited gifts of up to £250 to other people. Parents are able to gift £5,000 to children on marriage. They can also gift £2,500 to a grandchild or great-grandchild when marrying, and £1,000 to another relative or friend.
Alex Davies, founder of adviser Wealth Club, said gifts taken out of regular income, which are not deemed to affect your standard of living, are inheritance tax free: “Just remember that once you give away the money you’ve lost control. If you need it for an emergency, that’s not an option.”
Further gifts are known as “potentially exempt transfers” and only entirely IHT-free if you live seven more years. Charitable donations could reduce your overall IHT liability from 40 per cent to 36 per cent.
Davies urged everyone to make a will: “Otherwise the law will decide how your estate is distributed and it won’t be the most tax-efficient way.”
Last year 33,000 estates paid IHT, up by a third according to the OBR, with the average payment £160,000.