Beware the tax pitfalls that can catch unwary

The beginning of the new tax year is often accompanied by changes to allowances and tax thresholds. But, like so much of life, 2021 proves to be a bit different.

With the chancellor’s announcement in his March Budget, Inheritance Tax (IHT) thresholds have been kept on hold with an indication that will not change at least 2026. The position for Capital Gains Tax allowances is the same. So what’s the effect?

An individual still has a tax-free allowance of £325,000 before IHT will affect their estate.

That’s been the figure since 2010-11 but in that time inflation and rising house prices mean many estates that previously would not have been affected by IHT now fall into its grasp.

If the main allowance had kept up with inflation, it would now be more than £425,000.

More alarmingly, the annual allowance for gifts, also a great way to pass sums tax free, has been £3,000 since the 1980s. Had it risen with inflation, it would have more than tripled.

An additional allowance was introduced a few years ago and is now worth an additional £175,000 provided the deceased is passing their house to a “direct descendant”. So for most people with children or close relatives that makes an overall allowance of £500,000 for an individual.

If the deceased is married or in a civil partnership there is the possibility they leave everything to their spouse/partner which means the inheritance is exempt from IHT.

The deceased’s allowances pass to the spouse or partner, meaning the survivor could have allowances on their estate when they die of up to £1 million.

This is a considerable sum but we have come across many estates where the increase of house prices and investments mean families can face unexpected IHT bills.

Over the next five years, with thresholds frozen, the number of estates affected will increase.

With that in mind, making plans for the future is even more important. With careful planning, your assets can pass to those you want without the government potentially taking 40%.

IHT rules are complex and there are several pitfalls that can catch the unwary, so it is always best to get specific advice.

We have all been through a challenging year and hopefully things will now get better.

In the meantime, this is a good opportunity to take stock and make sure your wills and powers of attorney are up to date and your strategies still reflect your goals. Taking steps now can make a significant positive difference for the future.

■ Graeme Dickson.