More Britons are being hit by inheritance tax (IHT) as rising prices for houses and other assets is meaning more estates are becoming liable for the hefty tax.
Inheritance tax receipts have soared to more than £7.1billion over the course of the past year with receipts for April and May 2023 at £1.2billion, which is £100million more than last year.
Wealth firm RBC Brewin Dolphin has urged Britons to make sure they understand the rules as many families risk “sleepwalking” into being hit by a bill, which can be for tens of thousands of pounds.
Inheritance tax is a 40 percent tax that applies to any total assets a person inherits above a certain threshold. The threshold is £325,000 for an amount inherited from an individual and £650,000 for assets inherited from a couple.
There is an additional allowance if a person is inheriting a property that was the main residence of the deceased, and if they are the deceased’s child or grandchild.
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In this case, there is an additional allowance of up to £175,000 for single people and £350,000 for couples, although this tapers off for properties worth more than £2million.
Research from RBC Brewin Dolphin found two fifths of parents have not discussed their plans to pass on their assets, meaning their successors could get a nasty surprise when they inherit their estate.
Carla Morris, financial planner at RBC Brewin Dolphin, said: “The barriers to such conversations vary but tend to revolve around longstanding beliefs that death and finances are inappropriate subjects for the dinner table, as well as parents’ fear of losing control over their financial autonomy.
“If you or your family members are reluctant to touch the subject at all, it’s best to approach it in a transparent but compassionate way.”
Ms Morris urged families to plan ahead to look at ways to reduce their inheritance tax liability.
She said: “What’s right for you will depend on your individual circumstances and it’s important to seek financial advice.
“Making lifetime gifts is not only tax efficient, but also allows you to see your loved ones benefit from your wealth.
“There are a range of gifting allowances available, including gifts of up to £3,000 each tax year (your ‘annual exemption’), gifts for weddings or civil partnerships, and gifts from regular income.”
A person can give away up to £3,000 a year divided between any number of people. They can also separately make any number of gifts of up to £250 to different people.
An individual also has the option to give away a gift of a larger amount but they have to survive for another seven years for this to be tax free.
Ms Morris also pointed to pensions as another way to avoid the tax. She said: “Pensions usually fall outside your estate and so can be passed on to your beneficiaries free from IHT.
“The abolition of the pension lifetime allowance tax charge means you could potentially build up a larger pension pot and then pass on more wealth to the next generation free of IHT.”
People can also put assets into a trust meaning these assets will not be considered part of their estate when calculating IHT.
There are certain conditions around setting up a trust so it’s important to seek financial advice about how they work before creating one.
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