Inheritance tax explained by Interactive Investor expert
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The latest figures from HMRC revealed a £700million increase in inheritance tax receipts than in the same period a year earlier. One key factor likely contributing to the increase in IHT receipts is the soaring housing market, despite the stamp duty holiday drawing to a close at the end of September 2021. The latest figures showed a record high average UK house price of £288,000, an increase of 9.8 percent on the year.
Express.co.uk spoke exclusively to Darran Harrison, Wealth Planner at Kingswood about the soaring IHT receipts and record property prices. He said: “A key factor behind the latest hike in IHT receipts is likely to be the fact that both the nil rate band and residence nil rate band have been frozen until at least April 2026, resulting in many families receiving increased IHT bills as more estates are brought into scope on the back of rising property and share prices.
“This tax year, you can pass on £175,000 of your property tax-free, which is effectively doubled to £350,000 when combined with the allowance of your spouse or civil partner. That’s layered on top of your inheritance tax allowance – or nil rate band – of £325,000, meaning it is possible to pass on £1million inheritance free as a couple. Any above this is taxed at 40 percent.”
Since 2009 the nil-rate band of tax per person has been £325,000 (£650,000 per couple who are married or in a civil partnership). The nil-rate band is the amount of a person’s estate which is taxed at zero percent. Anything above this is then subject to IHT at 40 percent subject to any applicable deductions, exemptions and reliefs.
The Chancellor announced in the 2021 budget that there are no plans to increase the IHT thresholds until April 2026 at the earliest despite the backdrop of rising inflation and soaring house prices.
To try and combat this freeze on the threshold, Mr Harrison discussed ways that people can try and reduce the amount of their tax bill.
He suggested that Britons use the spouse and civil partner exemptions
Mr Harrison explained that married couples and civil partners can make use of each other’s tax-free allowance without special tax planning.
Gifts and transfers between married couples and civil partners living in the UK are IHT-free, so if the first partner to die leaves their entire estate to the other, no tax will be payable.
It’s also likely that none of their nil-rate band has been used, and the partner will be able to add the unused balance to their own, effectively doubling the threshold.
If a partner is not UK-domiciled however, limits can apply, and people should seek advice.
Another way to reduce the IHT bill is to make annual gifts.
Mr Harrison continued: “Single gifts of £3,000 per year can be made completely free of Inheritance Tax. Either to one person or split between several people. This allowance can be carried forward one year if you don’t use up all your allowance.
“In addition, you are able to make small gifts of up to £250 per year. There is no limit to the number of recipients in one tax year, and these small gifts will also be IHT-free, provided you have made no other gifts to that person during the tax year.
“Gifts in consideration of marriage or civil ceremony are another potential option, subject to limits according to who is making them.
“Regular gifts out of excess income can be made for IHT purposes, subject to specific affordability tests and qualifying criteria.”
People can also make lifetime gifts
People can make larger gifts of money. These are called potentially exempt transfers (PETs) and can be made at least seven years prior to death, however, this comes with “some conditions”, he explained.
He said: “One duly being that the assets must an outright gift (rather than, say, loaned or a gift with reservation) and another is that, should the donor die within the seven-year period, IHT becomes payable on a sliding scale.
“There’s an important caveat however! Determining whether such a gift is exempt only happens after your death, and is subjective.
“There’s a risk some gifts may be classed as being within your estate for IHT purposes if the taxman decides they did affect your lifestyle for example; therefore, if you are making habitual gifts it’s important to document your intentions and keep a record of this with your will.”
Mr Harrison suggested that Britons should take out life insurance to protect themselves and their families.
Life insurance can be a “simple but effective way to cover an IHT bill”.
He said: “You take out cover and place it under trust (so that the pay-out falls outside of your estate) and on your death it clears any IHT bill without exacerbating the tax situation.”
Lastly people can consider giving gifts to political parties, charities, trusts and amounts paid into private pensions are other avenues which the British public could potentially explore to reduce their inheritance tax bill.
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