Inheritance tax warning as more families cross the threshold – how to reduce the tax bill by 40% | Personal Finances | Finance


Inheritance Tax (IHT) is levied on estates over £ 325,000 and when due it is paid at a rate of 40 percent. This figure was chosen to ensure that only wealthy families pay tax, but it has remained unchanged since 2009 and has been frozen until at least 2026.

Unfortunately, this means that as inflation continues to rise, more families will be subject to the IHT. Rising house prices are also expected to force more people to face IHT fees and Richard Bate, partner of Weightmans LLP, has commented on the worrying trend.

“The sharp rise in UK house prices – which are on average already 13% higher than before the pandemic, according to Nationwide research – has created a sort of perfect storm on the inheritance tax front,” he told

“As house prices rise, so will the value of your wealth, which could cause you to cross the zero rate bracket or push more of your wealth above the threshold than expected.

“This is already the case for many households. HM Revenue & Customs figures show a 35% year-over-year increase in the number of people seeing their taxable wealth exceed the threshold, which is equivalent to a £ 0.7 billion tax increase. charges in just 12 months. “

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How to reduce the size of your estate for inheritance tax

Mr. Bate explained that the zero rate allowance may vary depending on individual circumstances. This includes whether a person is a widow or widower, or if they are eligible for the zero residence rate bracket.

The Residence Nil Rate Band was introduced in 2017 to protect against rising house prices and is currently capped at £ 175,000. It is designed to save money when property is passed directly to children or grandchildren – for estates up to a maximum value of £ 2million.

While there is little that can be done to slow the rise in house prices, Mr Bate provided advice on how people can downsize their estates and limit the impact of the IHT.

“Either way, while it is obviously not possible to reduce the value of your home, there are other measures you can take to reduce the size of your estate, namely to reduce the amount that is above the threshold, or to help you stay below. completely, ”he said.

The £ 325,000 zero rate bracket and £ 175,000 additional residence zero rate bracket are transferable between spouses and registered civil partners, leaving a surviving spouse or registered civil partner with a maximum possible threshold of 1 million pounds sterling.

“However, this creates a disproportionately damaging impact on those whose estates exceed £ 2million, but also on unmarried couples and those without children. The zero rate band remains frozen even as house prices rise. We urge the government to consider reforms to ensure that IHT rules are equal and fair. “

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Potentially exempt gifts and transfers

In addition to transferring assets between partners, people can also donate money, which in turn will reduce liability. Britons are allowed to give up to £ 3,000 per tax year without adding it to the value of their estate, in what is known as an annual waiver.

Any unused exemption can also be carried over to the following year. In addition, excess income can be distributed, provided this is done regularly. Mr Bate acknowledged that it might “look like a drop of water in the ocean” in relation to a domain’s overall value, but over the years it can make a significant difference.

He concluded: “Another option is a potentially exempt transfer (or PET) – a gift of an unlimited amount that will become IHT exempt if you survive the gift for a period of seven years. If you were concerned that the intended recipient might not yet be ready to handle such a gift, you may consider leaving the money in trust instead – just make sure that all tax charges associated with the trust are also carefully taken. If a trust is used, the maximum amount that can be donated without an initial tax charge is £ 325,000 over a seven year period.

“Our recommendation would be to seek tailored advice for your estate planning, to help you make the most informed decision possible about how to write your will, how to effectively use trusts and gifts to protect so much. as possible your inheritance. “

“The gifts have gone badly”

While enjoying freebies can be good for IHT, a recent analysis from Boodle Hatfield showed how damaging it can be if something goes wrong. According to company research, taxpayers have paid £ 125million in unnecessary taxes through ‘giveaways gone wrong’ over the past year.

Boodle Hatfield said the most common example is of parents offering the family home to their children while continuing to live there. This makes them “gifts with reserve of benefits” – assets that have been given to another person but are still used by the original owner.

These assets are considered by the tax authorities to be part of the donor’s estate for IHT purposes. As a result, those who received the assets could face a hefty tax bill.

According to his analysis, 440 people made the mistake of falling into the gift-booking trap in the last year alone. Boodle Hatfield warned that given recent increases in property values, HMRC will likely scrutinize IHT returns to ensure that the correct amount of tax has been paid and that donations of property, which have been made to mitigate IHT, were performed correctly.

With that in mind, Boodle Hatfield said people who are considering passing on assets should consider the “seven-year rule.” Assets can be donated without incurring IHT as long as the donor survives at least seven years after making the donation.

Geoffrey Todd, Partner at Boodle Hatfield, commented: “Hundreds of people are needlessly trapped each year when they pass assets on to the next generation.

“On average, they shed over a quarter of a million pounds each by falling into an avoidable trap.

“The complexity of the IHT diet means that it is very easy to make mistakes. Unfortunately, this can cause beneficiaries to face heavy bills, so it is crucial to seek professional advice before including the family home in estate planning.


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