Grappling with the nuances of IHT

Tony Mudd

Tony Mudd

The latest data from HMRC shows Britain’s inheritance tax bill has hit record highs, with families paying in excess of £2bn since March this year.

Despite HMRC coming under fire for rising receipts of 22.9 per cent over three months, it’s expected that receipts will increase to £6.2 billion by 2020/21. Families cannot afford to be complacent; the time for advice and financial planning is now.

There are few more confusing, or unpopular, taxes than Inheritance Tax (IHT).

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For older generations, the prospect of paying up to 40 per cent tax on what they leave behind is difficult to come to terms with.

Grappling with the nuances of IHT is something many children and grandchildren are ill-equipped to deal with.

As the HMRC figures show, more and more families have to deal with IHT due to soaring house prices, while rising stamp duty costs are making elderly people think twice about downsizing.

Families can take steps to mitigate the impact; by taking advice and suitable planning.

The earlier you start thinking about IHT, the easier and less damaging it is, and the more options people have.

That doesn’t mean that if you leave it late, it’s too late. There are still things you can do, they are just more limited.

New rules introduced earlier this year have provided some relief, such as the £325,000 threshold and the new ‘residence nil rate band’ (RNRB) which are transferrable; both tax-free allowances pass onto your spouse or civil partner when you die.

RNRB is increasing to £175,000 in 2020/21, meaning a married couple could eventually pass £1m to their children or grandchildren without attracting IHT.

However, the devil often lies in the detail; the reliefs often come with caveats and, unless you understand what those are, you risk making assumptions, often erroneous ones. 

Even if you do not consider yourself to be particularly wealthy, you may find the value of your individual or combined estates exceeds the tax-free thresholds.

As such, anything that reduces a potential IHT bill is worth considering.

Thoughtful estate planning can also help you pass wealth on to your designated beneficiaries in the manner you choose, while reducing your taxable estate.

There is plenty that can be done to keep a potential IHT bill to a minimum. Here are a few ideas: 

1. Use the allowance for individuals to give gifts worth up to £3,000 a year (£6,000 if you use the previous year’s allowance as well) without incurring any IHT.

2. Individuals can pass on larger amounts of money free of IHT, so long as they live for seven years after making the gift.

3. Take account of the ‘normal expenditure out of income’ rule – if you give gifts out of your income and, in doing so, don’t damage your standard of living, they are exempt from IHT, and there is no upper limit.