‘Act early!’ Inheritance tax set to rise – how to reduce your IHT bill

Inheritance tax explained by Interactive Investor expert

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Recent figures from HM Revenue (HMRC) suggest that the tax body took in almost £600million more in IHT between April and December in 2021. This means the total amount received by HMRC in inheritance tax receipts stands at £5.9billion, which is a rise from £5.2billion in 2020. Specifically, this amount comes from deaths that happened some time before, due to the extended period of time it takes for estates to get through the probate system.

Tax experts at Fidelity International predict that IHT bills will continue to rise and affect more households.

With the taxman seemingly taking more from everyday households in IHT, many are looking to protect their estate and reduce any potential bill down the line.

Ed Monk, an associate director at Fidelity International, outlined what savers can do to cut their IHT bill in light of the tax in inheritance tax receipts.

Mr Monk explained: “If the wealth being passed on includes a primary residence – like the family home – an additional £175,000 can be passed on without IHT applying, taking the potential nil-rate band to £500,000.

“What’s more, spouses and civil partners can pass on any unused nil-rate band to each other.

“So a surviving spouse who has passed the entirety of their partner’s unused nil-rate band could, potentially, pass on as much as £1million without inheritance tax being an issue.

“Those sound like big numbers but bear in mind that rapid house price rises, and the strong returns we have seen for assets like shares in recent years, means that the value of estates has been rising strongly.

“With current IHT allowances now frozen – the Government says they will not change until 2026 at the earliest – even more people will be pulled within the scope of inheritance tax.”

Furthermore, the tax expert provided additional advice as to how people can reduce their inheritance tax bill within the current system in place.

Mr Monk added: “There are measures that you can take to mitigate the effects of IHT, and to make the process of administering the estate of a loved one easier after death.

“That might include informing pension schemes of where you wish any death benefits to go, or it might mean taking advantage of the various exemptions in the IHT system for gifting money during your lifetime.

“The key is to act early and seek out help to work out if you’ve got an IHT liability. It can help to talk to someone about your investments, particularly about your pensions.”

Currently, inheritance tax is paid at 40 percent of someone’s estate but it’s only charged on parts of an estate which are above the standard rate threshold of £325,000.

Recently, HMRC revealed that £4.6billion was paid to the Government between April and December 2021 in inheritance tax.

IHT is paid on the estate, which includes the money, possessions and property, of someone who has passed away.

The Government announced last year it was freezing the £325,000 nil-rate band for IHT and £175,000 residence nil-rate band until April 2026.

Outside of changes to IHT probate rules, the Chancellor Rishi Sunak has yet to make any further drastic changes to rules regarding inheritance tax in a bid to generate more revenue for the Treasury.

The next Budget announcement, which may provide further updates to current IHT legislation, is set to take place on March 23, 2022.

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