Nine tips to raise inheritance tax threshold – expert

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Inheritance tax (IHT) is applied to the estate of someone who has passed away, such as assets, property and money, and can often leave families and loved ones with a hefty bill to pay. However, if managed strategically, people can legally boost the tax threshold and pass on a lot more to friends and relatives.

Recent figures show that HMRC raked in another £3.5billion in inheritance tax receipts in the six months to September 2022. This is £400million more than in the same period last year and continues the upward year-on-year trend.

While hopes were raised during the Conservative leadership contest that IHT would be reviewed, the recent whirlwind of U-turns and resignations means it’s now likely to be at the very bottom of the Government’s list of priorities.

Alex Davies, CEO and founder of Wealth Club said: “The Government’s inheritance tax take seems to be increasing relentlessly, largely thanks to the steady increase in house prices in recent years pushing more families into the IHT danger zone. With all that’s going on in Downing Street, we can’t see that there is any chance that this money-spinner will be reduced or abolished any time soon.

“The OBR has already predicted that next year IHT will bring in £6.7billion and while only one in 25 estates currently pays this tax, for those that are picking up the tab, we think the average bill could reach £266,000 for the current tax year.”

This increase is being largely driven by soaring house prices and years of frozen allowances.

The nil-rate band, which is the maximum threshold a person can inherit before paying IHT, has been frozen at £325,000 since 2009.

But, while UK inflation rates rocket and house prices surge, it’s argued that this threshold is now far too low and it’s hitting many households much harder.

Mr Davies said: “Without some review of the rules, more and more families will find themselves hit by death duties they might not expect.”

How inheritance tax is calculated?

An inheritance tax (IHT) of 40 percent is usually chargeable if a person’s assets exceed a certain threshold, after deducting any liabilities, exemptions and reliefs.

The threshold (nil-rate band) has been £325,000 per single person since April 6, 2009 – and will remain frozen at this level up to and including 2025-26.

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There is an additional transferrable main residence nil rate band of £175,000 available when passing the family home down to children or other direct descendants, and any unused threshold may be transferred to a surviving spouse or civil partner.

However, Mr Davies said: “The good news is that with some careful planning there are lots of perfectly legitimate ways you can eliminate or keep IHT bills to the minimum, so more of your wealth is passed on to your loved ones rather than being syphoned off by the taxman.”

Make a will

Making a will is one of the most important steps in the process.

Mr Davies said: “Without [a will], your estate will be shared according to a set of pre-determined rules. That means the taxman might end up with more than its fair share.”

Use gift allowances

Every year, people can give up to £3,000 away tax-free. This is known as the annual exemption.

Mr Davies said: “If you didn’t use it last year, you can combine it and pass on £6,000.”

People can also give up to £250 each year to however many people they wish (but only one gift per recipient per year) or make a wedding gift of up to £5,000 to their child; up to £2,500 to their grandchild; up to £2,500 to their spouse or civil partner and £1,000 to anyone else.

Mr Davies said: “Beyond these allowances, you can pass on as much as you like IHT free. So long as you live for at least seven years after giving money away, there will be no IHT to pay.”

Make regular gifts

People are also able to make regular gifts from their income.

Mr Davies said: “These gifts are immediately IHT free – no need to wait for seven years – and there’s no cap on how much you can give away, provided you can demonstrate your standard of living is not affected.”

Leave a legacy and give to charity

If people leave at least 10 percent of their net estate to a charity or a few other organisations, they may be able to get a discount on the IHT rate. This could bring the tax down to 36 percent instead of 40 percent – on the rest of their taxable estate.

According to a report, gifts left in Wills currently raise £3.4billion annually, which accounts for 16 percent of all fundraised income for UK charities, and this number is expected to double again by 2050.

Use the pension allowance

Pensions are not usually subject to IHT for those under 75 years old.

Mr Davies said: “They can be passed on tax efficiently and, in some cases, even tax-free. If you have any pension allowance left, make use of it.”

Set up a trust

Trusts have traditionally been a staple of IHT planning. By setting one up, it can mean money falls outside an estate if the person lives for at least seven years after establishing it.

However, Mr Davies said: “The related taxes and laws are complicated – you should seek specialist advice if you’re considering this.”

Invest in companies qualifying for Business Property Relief (BPR)

If a person owns or invests in a business that qualifies for Business Property Relief (BPR) – and the majority of private companies and some AIM-quoted companies do – they can benefit from full IHT relief.

Mr Davies said: “You must be a shareholder for at least two years and still be on death, though.”

Invest in an AIM IHT ISA

ISAs are tax-free during a person’s lifetime but when they die, or when their spouse dies later, these could be subject to 40 percent IHT, too.

Mr Davies suggested: “An increasingly popular way of mitigating IHT on an ISA is to invest in certain AIM quoted companies that qualify for BPR. You must hold the shares for at least two years and if you still hold them on death you could potentially pass them on without a penny due in inheritance tax.”

Back smaller British businesses

The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) offer a generous set of tax reliefs.

Mr Davies explained: “For instance, SEIS offers up to 50 percent income tax and capital gains tax reliefs, plus loss relief if the investment doesn’t work out. But EIS and SEIS investments also qualify for BPR, so could be passed on free of IHT.”

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