Thousands more people are expected to pay Inheritance Tax (IHT) - but there are ways you can legally avoid it.
Under the current laws, you need to pay 40% Inheritance Tax on your "estate" - so your property, money and possessions - that you pass on after you die - but only if you are leaving more than £325,000 behind. This levy is usually considered as only affecting the extremely wealthy however, due to the Government freezing the tax band at £325,000 until 2026 and as house prices continue to skyrocket more people are getting pulled into paying the tax.
This is made even worse because of high inflation and interest rates. According to the Office of Budget Responsibility (OBR) the number of people expected to pay the tax will rise from 40,000 to 50,000 by 2027.
As more Brits are expected to pay the levy in the coming years, people will need to look at ways to manage their money and potentially avoid the tax before they die. There are several legal ways you can avoid paying and considered one of the easiest ways you can reduce your inheritance tax liability when you die, is by gifting whilst you are still alive.
In particular, you can get a break from the tax by making “gifts out of surplus income” - yet it is very underused. Only 430 families utilised it last year, according to a Freedom of Information request submitted by The Telegraph.
According to the rules, all adults can give away a maximum of £3,000 every year without paying tax on it. This is known as a person’s “annual exemption”. This cash can be given to just one person or it can be split between several. You are also allowed to carry over your unused annual exemption to the next tax year - however, you can only do this for one tax year.
Couples can combine their allowances meaning they can give away £6,000 without paying tax. You can also give as many gifts of up to £250 per person each tax year. You can only do this as long as the person receiving the cash has not benefited from a gift within the £3,000 limit.
Birthday and Christmas gifts which are given from a person’s regular income are also exempt from Inheritance Tax. Parents can give their children £5,000 if they are getting married and can give £2,500 to a grandchild or great-grandchild. They can also give a gift of up to £1,000 to another relative or friend.
You can also make regular payments to help with another person’s living costs. This is known as "normal expenditure out of income". These payments can be made through things such as your salary, money made from a side hustle or second job, from savings or pension income.
However, to avoid paying Inheritance Tax the gifts should be given in a "regular pattern" - so you have provided these payments for several years. A single gift will qualify only if there is strong evidence that it was intended to be the first in a pattern. Gifts should also ideally be around the same size.
They must also not impact your own standard of living - so you should be able to afford the gifts once you have paid your normal outgoings such as mortgage payments, rent, bills etc.
If you believe you are at risk of paying Inheritance Tax, then the most important thing you can do is get financial advice from an expert. They can advise you on the best steps you can take when leaving money, property or your assets to your loved ones when you die.