Beware falling into the inheritance tax trap – Birmingham Post article 09.06.2022

Inheritance tax (IHT) is on the march – to the despair of many, though not the Government.

A total £6.1 billion was collected in the year to the end of March, 15 per cent more than in 2020-21, with the Office for National Statistics predicting it will raise £7.6 billion by 2026-27.

This is largely down to rising property prices and a freeze on thresholds, so dragging more families into the net.

The rate is 40 per cent but you do not pay anything I you on an estate worth less than £325,000, known as the IHT nil rate band. This goes up to £500,000 if you can pass your main home to your children or grandchildren – the additional element referred to as the residence nil rate band. Spouses get double, so the combined figure climbs to £1 million, which may seem generous, but is set to stay that way until at least 6 April 2026.

Less generous still given the average asking price for a property in May was £367,501, according to property website, Rightmove, jumping by £55,551 in the past two years.

Alex Davies, chief executive of Wealth Club, told FT Advisor: “It’s now believed that the average family impacted by inheritance tax will face an average tax bill of £200,000.”

But, he added: “There are perfectly legal and legitimate ways to reduce your inheritance liability.”

So, what are they?

Mr Davies says you should start by writing a will.

He commented: “It never ceases to astonish me that 40 per cent of Britons aged over 55 do not have one. Then, hand out cash – to your family members and to charity – though don’t give away so much that you end up scrounging from your children for your care costs: they may be less generous than you are. Finally, take advice on exemptions and reliefs.”

There are quite a few, as iMoney spells out.

You can make outright gifts of any value tax-free to individuals including family and friends, provided it is at least seven years before your death. The rate starts to fall three years after the gift is made and drops gradually to zero over the following four. However, watch out for pitfalls.

Regular gifts out of your surplus income form another concession. There is no limit on their value, though, for the exemption to apply, they must not adversely affect your standard of living.

Each tax year, you can make one or more tax-free gifts up to a limit of £3,000 in total.

If you leave ten per cent or more of your estate to charity, the IHT rate applied to the rest will be reduced from 40 per cent to 36 per cent. Alongside that, the value of the charitable gifts themselves will be deducted before IHT is charged.

If you have agricultural property or woodlands, you may qualify for full or partial tax relief under APR (Agricultural Property Relief).

Similarly, for entrepreneurs, BPR (Business Property Relief) is a possibility. You must have owned a trading business or business assets for at least two years before your death. Relief from IHT is available at either 100 per cent or 50 per cent depending on the type of assets held. You can invest in assets that qualify for BPR, but financial advice should be sort.

There are other more modest exemptions, such as one for small gifts made to any one person not exceeding £250. With wedding gifts, the limits are between £1,000 and £5,000 depending on your relationship to the bride or groom.

IHT affects fewer than five per cent of us. Don’t let it be you!