Inheritance tax: How to lower your bill as more families hit | Personal finance | Finance

The topic of inheritance is one that many people put off, but failing to plan effectively could mean their loved ones end up with a hefty Inheritance Tax (IHT) bill. Paul Scarff, Chartered Financial Planner at Estate Wealth, spoke exclusively to and discussed some of the options people have to lower their bill.

Mr Scarff explained that although inheritance tax was once seen as a tax only for the wealthy, with rising house prices more families could find themselves facing a bigger tax bill.

He said: “The latest figures from HMRC revealed a £600m year-on-year increase in Inheritance Tax (IHT) revenue in the first half of 2021/22.

“Unfortunately this means that as inflation continues to rise, more families will be subject to IHT on estate worth over £325,000, including possessions, money and possessions of a deceased loved one.

“Those who own their own home can receive additional support of up to £175,000.”

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“Second, the standard inheritance tax rate is 40%, which can significantly reduce what you leave behind. If you choose to leave 10% or more of your estate to charity, the inheritance tax rate will drop to 36%.

“Depending on the size of your estate, this reduction may mean that you leave more to your loved ones while also providing financial support to a charity.

“If you wish to use a charitable inheritance to reduce inheritance tax, this must be included in your will. A charitable bequest can be a fixed amount, what remains after other gifts have been given, an item or a percentage of your estate.

Gift to family and others

A gift to family or friends during their lifetime can be another way to reduce the value of an estate for estate tax purposes while providing a benefit to loved ones.

Using the annual gift allowances, it is possible to give someone up to £3,000 in total each tax year.

Mr Scarff continued: ‘If you haven’t used your annual exemption in the previous tax year, you can transfer £6,000 – however, you can only carry the exemption over for one year. taxation.

“Parents can also give their children who are getting married gifts worth up to £5,000 without affecting their other allowances, while grandparents can give up to £2,500.

“When giving these gifts, it’s just as important to keep a good record of who you gave the gift to and how much. This will make it easier for the executor to determine during probate which parts of your estate are subject to tax.

“If you have any doubts about how donations might affect your estate tax position, you should seek professional advice, especially as some rules can get quite technical.

Starting a trust fund

Another popular estate tax planning strategy is to transfer assets into a trust, which is a type of legal arrangement in which one person gives money, property, or investments to someone else, known as the appointed trustee.

The appointed trustee has the legal ability to manage the assets on behalf of the chosen beneficiaries.

Some people decide to put some of their savings aside in a trust fund for their children or grandchildren.

Ms Scarff said: ‘However, it is important to note that if the estate passed on exceeds the deceased’s IHT allowance, you may have to pay a 20% charge on all assets when they were originally placed in the trust.

“In addition, when the trust is closed or the beneficiaries withdraw the assets, another tax charge is applied up to 6%, depending on the date of the last 10-year valuation.

“Given the complex structure of trusts, individuals are strongly recommended to consult a professional to understand all the legalities.”

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