Are you now liable for Inheritance Tax?

Could you now be liable for Inheritance Tax?

Inheritance Tax has become a ‘mainstream tax’ for many and people are being warned to put their finances in order to make passing on their wealth to the next generation as tax efficient as possible.

The Government has taken £7.2billion in Inheritance Tax (IHT) receipts for the 2022-23 tax year, HMRC figures have revealed and the Office of Budget Responsibility (OBR) is forecasting it will rise to £8.4bn by 2027-28.

This record amount is largely due to ongoing high property prices and the fact the IHT threshold is frozen at £325,000 since 2010 and will remain so until 2028.

This means even those with a relatively modest property and assets are finding themselves becoming liable for IHT.

The tax-free allowance on an estate is £325,000 (£650,000 for couples) and anything above that is taxed at 40%.

Of course, there is also the exempt Residential Nil Rate Band allowance of £175,000 per person and £350,000 for a married couple, which applies when residential property passes to direct descendants on death.

Property prices remain high here in the South West and even a relatively small detached home or bungalow is highly unlikely to sell for less than £300,000 and the average property price in Devon is £334,000.

So, if you know or suspect your estate could well be over the relevant exempt threshold, please don’t leave it too late and seek advice from an experienced and professional financial adviser to ensure everything is in order.

Measures such as setting up a trust, making use of gift allowances and using your pension to cascade wealth tax efficiently, can all help manage the value of your estate for IHT purposes.

You can give assets to children or other family members but bear in mind once it’s given away, you have no control over that asset. You have a relatively small personal £3,000 per annum gift allowance that can be rolled over for one year ie to £6,000, but only once. So for a couple that’s up to £12,000. Gifts from ‘surplus’ income are also exempt but careful documentation will be required.

Larger gifts can be made and these are known as Potentially Exempt Transfers (PETs). There is no upper limit on the amount. But if the donor passes away within seven years of the gift, a portion of the gift falls back into the estate and is liable for IHT.

Trusts are a possibility but can be complicated and need expert advice and careful planning. There are two main types of trust: a will trust, created on your death, or a lifetime trust, set up during your lifetime.

A will trust would typically see your assets granted to the trust on your death, whereas a lifetime trust would be set up straightaway. Distributing an estate and planning for IHT needs to be carefully considered, especially if assets such as company shares, property and pensions are involved.

Nevertheless, paying for a little advice now can save many thousands of pounds later on.