Inheritance tax net catches thousands more families in a year: Here's how you CAN cut your bill

Daily Mail​

2 days ago

The number of families paying inheritance tax soared 13 per cent in a year, fresh official data reveals.
Some 31,500 families paid the much-hated death duties on a loved one's estate in 2022-23, according to the most recent tax office data available. That's compared to 27,800 the previous tax year.
A total £6.7billion was handed over to the taxman in 2022-23 - up 12 per cent on the previous year. Almost half of the estates handing over money to the Exchequer were in London and the South East.
The lowest number of taxpaying estates were in the North East, Northern Ireland and Wales, mainly due to lower house prices.
Britain's most-hated tax is already rich pickings for the Chancellor, but experts warn these latest figures – which are from the 2022-23 tax year because of the time it takes to settle an IHT liability – are just the 'tip of the iceberg'.
A combination of frozen tax thresholds and soaring asset values has already dragged thousands more families into paying death duties.
The tax is levied at a 40 per cent rate on an estate over a £325,000 threshold.
Those who leave their property to direct descendants have an extra £175,00 tax-free allowance, meaning £500,000 is exempt.
But the £325,000 threshold - known as the nil-rate band – has been frozen since 2009 which has pulled middle-income families into the tax net as their asset and property values soar in a phenomenon known as fiscal drag.
Fewer than one in 20 UK deaths resulted in an IHT charge but this is set to soar to one in ten by the end of the decade as the Treasury's net widens.
This latest data reveals a growing squeeze on grieving middle-class families – and that's before the sweeping IHT changes announced at last year's Budget come into place.
Droves of estates are anticipated to fall into the tax net in the coming years, says Ben Handley, a tax partner at accountancy firm BDO, as 'seismic changes to the regime' come into force from 2026.
'From next April, the capping of business and agricultural relief to £1million of qualifying assets will bring many business and farm owners into scope for IHT for the first time.'
And the increased burden doesn't stop there.
Not only are the thresholds frozen for an extra two years – until April 2030 – swathes of bereaved families will be pulled into the net from 2027 as unspent defined contribution pension pots will be included in an estate.
It's a move that has upended many people's retirement planning and will slash the legacy families will be able to pass on free of the much-hated duty.
Mr Handley says: 'These changes will impact around 8 per cent of estates – and add significant administrative burdens to families at a difficult time.'
The most recent data on tax receipts reveals the Exchequer has already raked £2.22billion into its coffers between April and June this year – a 6 per cent hike on last year. Annual IHT receipts are forecast to soar to £14.3 billion in 2029-30.
Ian Dyall, head of estate planning at wealth manager Evelyn Partners, explains the bulk of money handed over to the tax office is currently made by a small number of very large estates.
'Families with that level of wealth tend not to garner much sympathy but the Treasury cannot sustainably prop up the public finances by taxing the wealthiest 1 or 2 per cent forever without consequence.
'The danger with seeking further taxation of wealth at the next Budget – whether that is via capital gains tax, inheritance tax or some other mechanism – is that such households, which are often wealth and business creators in themselves and quite mobile, could get fed up and leave the country.'
How to slash your inheritance tax bill
There are ways you can hand over a legacy to children and grandchildren while keeping your hard-earned cash out of the Chancellor's clutches.
If you leave your property to a direct descendant – such as children or grandchildren – you get an extra tax-free allowance of up to £175,000. That means an easy way to prevent a huge tax bill after death is to give your home to your children.
Between a couple, that means you can pass on a £1million family home free of the death duties.
If you want to pass on any cash or material gifts, make them earlier instead of later.
This is because gifts that you give away during your lifetime are free from IHT so long as you survive for seven years after giving them.
Die within seven years and they count towards your tax-free allowance of £325,000, so they reduce the amount of your estate that can be passed on without incurring a bill.
Gifts made over your nil-rate band of £325,000 benefit could benefit from taper relief.
The closer to the full seven years you survive, the less tax your beneficiaries need to pay.
For a payment made in the last three years before death, the full 40 per cent is levied.
But any gifts made four to five years ago face a 24 per cent charge, while those made five to six years before your death have a 16 per cent IHT rate.
Those given six to seven years ago are charged at 8 per cent. Make payments sooner rather than later to lessen the chance that your loved ones will foot a huge 40 per cent tax bill.
Plus, you can make the most of your gifting allowances to pass on wealth tax-free while you are still alive.
Everyone gets a £3,000 annual gift allowance, which is exempt from their estate.
Plus, if you didn't use this year's allowance you can carry it forward to the next tax year, but it can't be carried forward any further.
This means a couple could give away up to £12,000 completely free of IHT in one tax year. The seven-year rule does not apply here, so if you die within that period of making these gifts there is still no IHT payable.
You can also give away an unlimited number of small gifts up to £250, so long as you haven't used another IHT allowance on the same recipient.
Another nifty trick to reduce the tax bill on your estate is to make a tax-free gift to someone getting married or entering a civil partnership.
You can give £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to anyone else.
But these gifts need to be made 'in consideration of' a marriage or civil partnership so payments must be made just before it takes place and not after.
Growing numbers of families are also considering putting life insurance policies into trust to pay any potential tax bill.
These pay out to your loved ones when you die and if they are placed correctly into trust they are treated as if they are not part of your estate – and therefore free of inheritance tax.
You can appoint one or more beneficiaries who will be paid the full policy sum when you die.
However, this can be a costly planning tool and may come with risks.
For example, you may forfeit the cover if you stop paying the premiums at any point.
Once you start paying it, it can be difficult to increase your cover should your IHT liability rise. Seek expert advice before going ahead.
Arguably the most generous allowance is known as gifts out of normal expenditure, where you can gift an unlimited amount of money.
However, there are strict criteria you must meet. The payment must be regular, out of income and must not affect your standard of living - and you must keep good records.