Inheritance tax to hit more Britons as £7.2billion in bills predicted for 2023

Families have been urged to take action and reassess their finances as increasing numbers of people are being hit by inheritance tax (IHT).

The Government is set to rake in £7.2billion this year in total IHT receipts with receipts for the first three months of this year already hitting a record high, as the Treasury collected £2billion.

Laura Hayward, tax partner at Evelyn Partners, urged families to look at their tax planning to avoid paying more tax than they need to.

She said: “They can minimise the chances of being hit by a sizable IHT bill under the current regime by taking the appropriate action now.”

Inheritance tax is a 40 percent tax that applies to any total inherited assets above the value of £325,000 from a single person, or £650,000 from a couple.

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There is an additional threshold if a person is inheriting a property which was the primary residence of the deceased, including up to £175,000 for a single person and £350,000 for a couple. This tapers away if the property is worth over £2million.

These thresholds are frozen until 2028 with inflation and wage increases meaning more people are being driven into paying the tax

Fortunately, there are several things people can do to minimise their IHT liability or avoid their loved ones’ having to pay the tax at all.

Julia Peake, tax and estate planning specialist at Canada Life, said: “With the right financial planning, IHT can be a largely discretionary tax.

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“But many estates have found they have been caught by the IHT tax net through growing house prices, compounded by the freezing of nil-rate and resident nil-rate tax bands.

“The effective use of trusts and gifting, and the right retirement income strategy, can all help minimise the value of your estate when it comes to calculating any IHT liability, ensuring it can be passed on to your beneficiaries as efficiently as possible.”

By giving away IHT-exempt gifts, a person reduces the size of their estate and slashes their IHT bill as well.

An individual can give away up to £3,000 each year tax-free divided between any number of people.

A person can also give away any number of gifts up to £250 to different people each year.

There is also the option to gift a larger amount and still avoid the tax, but a person has to survive seven years for the amount to avoid IHT.

Trusts are another way to avoid IHT, as assets that go into a trust are not considered part of a person’s estate for IHT purposes.

However, these are complicated to set up so it’s worth talking to a financial advisor about how to do this.

Another way for a person to reduce their liability for IHT is to move some of their savings into pensions, as these are also not considered to be part of a person’s estate.

Like any form of savings, the growth of pensions will compound over time and can provide a good source of income for a successor, once they reach the age when a person can draw down from their pensions.

Nicholas Hyett, investment manager at Wealth Club, warned some people may end up overpaying on IHT as house prices are currently falling.

A person can claim back overpaid tax using a ‘loss on sale relief’ IHT25 form, which applies to the sale of qualifying investments such as shares

There is also a lesser known form, the IHT38 form, which allows a person to reclaim money from the sale of a property or land.

Mr Hyett said: “Beneficiaries have four years from the date of death and could potentially save tens of thousands on some larger estates, especially now house prices are falling.”

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