An estimated 41,000 taxpayers incurred an inheritance tax liability on death in 2022/23, according to new HMRC data – a 24% increase on the previous year (33,000), leading experts to advise homeowners, or those with large savings and investments, to act now to avoid their families losing out in the future.
The freeze in the £325,000 threshold is in place until 2028 and will certainly pull many more people into paying IHT for the foreseeable future.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, says: “It is important to consider the possibility your estate may incur IHT within your financial planning.”
Inheritance tax (IHT), she goes on to say, helped in large part by house price increases, is no longer a wealthy person’s tax
“You can reduce the amount you pay by making use of the different allowances on offer. If you leave your estate to your spouse, then they won’t pay inheritance tax and when they die, they can also make use of any of your unused nil rate band to increase the amount they can pass on free of IHT.
“Leaving your property to children or grandchildren means they benefit from the residential nil rate band of £175,000.’
Giving your money away while you are alive is also another option. Gifts given are IHT free as long as you live for at least seven years after making them. You can also give gifts of up to £3,000 a year, split between as many different people as you want, as part of an annual exemption. Unlimited gifts of up to £250 can be made as long as you haven’t used any of your other allowances on that person.
If a loved one is getting married, you can also make gifts that won’t incur IHT. This is up to £5,000 for your child, £2,500 for a grandchild or great grandchild or £1,000 for anyone else.
You can also make gifts to help someone with their living expenses – i.e. a child’s rent. This is known as gifts out of normal expenditure and can be of any amount, but you must show that in doing so you aren’t negatively impacting your own standard of living. Documenting when gifts are given and how much they are is hugely important to establishing a regular pattern.
“If you know you will have an IHT liability on your estate, Helen Morrisey concludes, “then you can get a life insurance policy written into trust which can be used to pay any tax bill incurred.”
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