Inheritance tax: Ten ways you can ensure Government doesn’t take all your cash
Inheritance: Expert gives advice on 'good planning'
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It comes at a time when many living and working in city centres such as London are unable to buy a home for themselves, and some are forced to rely on inherited property. The latest figures from HM Revenue and Customs show that the amount of inheritance tax received by the Treasury increased by a massive £300million in the past three months (April-June), when compared with the same time last year.
It means the Government made £1.8billion from the so-called “death tax” in that period.
While there were an atypical number of deaths in April and May last year due to lockdown restrictions, according to ONS figures, but inheritance taxes remained in line with trends in previous years.
Calculations by broker Wealth Club suggest that the average death tax bill could shoot up to over £266,000 this financial year – a 27 percent increase from the £209,000 average three years ago.
The company said that the effects of the worst levels of inflation in 40 years were being compounded by frozen thresholds.
More and more assets’ values were creeping over into higher tax bands purely because of the state of the economy, they said.
Alex Davies, the firm’s founder and chief executive, said: “This increase is being fuelled by soaring house prices and years of frozen allowances which are now being decimated further by rampant inflation.
“Currently just four percent of estates pay inheritance tax, but given the nil-rate and main residence nil-rate bands are frozen until at least April 2026, it is likely the estates of many individuals with more regular incomes and average value homes will end up getting caught out by this most hated of taxes.
“With the Government purse under pressure from all angles there is unlikely to be any respite from this soon.”
Estates valued under £325,000 are not subject to any inheritance tax, something which has remained the same since 2009. In the same time, inflation has risen 45 percent.
There is also a no-tax threshold of £175,000 for passing on a family home to a direct descendant. The average UK house price was £283,000 in May.
However, Mr Davies said there were “still lots of perfectly legitimate and sensible ways to pass on money free of inheritance tax to your heirs”.
Wealth Club suggests these ten top tips to those looking to save cash:
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1 – Make a will: Otherwise, your estate will be handled by HMRC and the Government will likely get a greater proportion of your wealth.
2 – Utilise gift allowances: You can give away up to £3,000 a year without paying tax, or £6,000 if you didn’t use it last year. Alternately, you can give £250 each year to as many people as you want, or up to £5,000 as a child’s wedding present (£2,500 to a grandchild or spouse).
3 – Make your gifts larger: If you’re likely to live for seven years after making a gift, it can be of any size without attracting any inheritance tax.
4 – Give a tenth to charity: Leaving at least 10 percent of your estate to charity means you may be able to reduce the inheritance tax rate from 40 percent to 36 for the rest of your estate.
5 – Make the most of your pension: Wealth Club says that as pensions are usually not subject to inheritance tax, you can pass your remaining pension pot with little or no tax accrued.
6 – Invest in companies that qualify for Business Relief: A “valuable” way of reducing your inheritance tax bill is owning or investing in firms that qualify for Business Relief at least two years before you die. Depending on your ownership, you may be able to pass these on without being taxed on them.
7 – Invest in Business Relief ISAs: ISAs are tax-free during someone’s lifetime, but usually fall under the 40 percent inheritance tax when passed on. But investing in companies that qualify for Business Relief through your ISA means your loved ones could get them without paying a penny in tax.
8 – Back small British businesses: The Government does offer “generous” tax reliefs through certain schemes for investing in small enterprises based in the UK. These investments could be passed on for free.
9 – Set up a trust: Putting money aside in a trust at least seven years before you die means more money falls outside your estate – but this can be tricky to do and may require specialist legal advice.
10 – Magic money trees: An “underused” option, according to Wealth Club, is to invest in commercial forestry, which should be free of inheritance tax if held for at least two years before you die – and you benefit from any income produced from harvesting the trees.
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