Inheritance tax: How to avoid paying 40% to HMRC when giving gifts to family this year

Inheritance tax explained by Interactive Investor expert

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Those who have property, assets or cash sums to pass on will want to avoid being slapped with a 40 percent inheritance tax (IHT) bill. HM Revenues and Customs (HMRC) has updated its guidance for people looking to give financial gifts this year – here’s all you need to know.

As no one knows how long they have left for certain it’s also advisable to follow the seven HMRC exceptions for giving financial gifts this year.

The threshold which Britons have to pay inheritance tax on their estate was recently frozen at £325,000, rising to £500,000 if given to children or grandchildren.

Homeowners don’t have to pay tax if their property is worth less than £325,000 but as property prices have increased more British families are being caught out.

Getting it wrong can be a huge expense as anything above the current threshold is subject to a hefty 40 percent tax bill.

There are seven legal exemptions – which if followed to the letter could save taxpayers a fortune.

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Which gifts are exempt from inheritance tax?

  • Assets passed to a spouse or civil partner
  • Gifts to qualifying charities, housing associations, and other exempt organisations
  • Potentially exempt transfers (gifts made seven years before the person died)
  • Gifts of £3,000 or less in any tax year
  • Small gifts of £250 or less
  • Wedding and civil partnership gifts
  • Regular gifts or payments that are part of your normal expenditure and made out of income

When it comes to passing on property to a family member, law firm Boodle Hatfield has set out some good tips.

It says there are a number of ways in which homeowners can reduce the IHT bill on their estates without falling into the ‘gifts with reservation of benefit’ trap.

Suggestions include downsizing or cohabitation, depending on someone’s family circumstances.

While these solutions may not be ideal they could save Britons around a quarter of a million pounds.

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Boodie Hatfield’s tips for avoiding paying IHT on a property:

  • Paying a market rent – giving the property to family members but paying a full market rent for their continued use of the property
  • Downsizing – selling the property, buying a smaller one and gifting the net proceeds to one’s children
  • Cohabitation – giving a share of the property to family members and living in the property together
  • Equity release – making use of a lifetime mortgage or equity release can enable owners to gift cash to their children. However, this should be approached with caution, as fees and interest payments will further reduce the inheritance that beneficiaries could otherwise receive.

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