Inheritance tax explained by Interactive Investor expert
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Inheritance tax and capital gains tax bills are set to rocket, as Sunak scrambles for ways to top up the Treasury’s coffers. Tax experts are urging people to make full use of this year’s IHT and CGT allowances, before the April 5 deadline. It’s now less than a month away.
In his Budget last March, Sunak froze the inheritance tax nil-rate threshold at £325,000 for five years, until the 2025/26 tax year at least.
He also froze the nil-rate residence band at £175,000, also for five years. This applies to families passing on their main home to direct descendants such as children and grandchildren.
At the same time, the Chancellor also froze the capital gains tax allowance at £12,300, again, until 2025/26 at least.
This is the amount of capital gains a UK adult can make each year, before they have to pay CGT on their profits.
The freeze will catch more and more families in the tax net every year, as house and share prices rise, but tax thresholds stay the same. It’s as if Sunak has launched a fresh tax raid each year.
IHT is charged at a thumping 40 percent on all assets that fall above the threshold, including the value of your home.
CGT rates are more complex. Currently, basic rate taxpayers pay CGT at 10 percent on annual gains above £12,300, while higher-rate taxpayers pay 20 percent.
These increase to 18 percent and 28 percent respectively, when selling an investment property or second home.
Both taxes are getting more lucrative for HM Revenue & Customs. HMRC collected a record-breaking £6 billion in 2021, up £600 million.
In 2020/21, the taxman took a staggering £10.61 billion from CGT, up £800 million on the previous tax year.
These figures are set to rise thanks to Sunak’s tax freeze, warns Mike Hodges, tax partner and head of the Private Wealth Practice Group at Saffery Champness.
“Many who thought they would never have to pay IHT or CGT could now find themselves facing a shock bill, and it could be bigger than they expected.”
As we reported yesterday, soon the average home could incur an inheritance tax bill, bringing millions of families into the IHT net.
Hodges said the “fiscal drag” effect of Sunak’s five-year freeze will still see more taxpayers finding themselves caught out by higher tax bills.
He added: “It is common sense, where possible, for taxpayers to use this year’s allowances to the full, to reduce their exposure.”
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Families can cut IHT exposure by making cash gifts to loved ones each tax year, says Becky O’Connor, head of pensions and savings at Interactive Investor.
“Adults can gift a maximum £3,000 each year with no IHT to pay, so couples can combine their allowances and gift £6,000.”
You can mop up unused allowance from last year, so couples could gift £12,000 in total.
“Plus they can also make smaller gifts of £250 to as many people as they like, provided the recipient has not benefited from the £3,000 limit,” O’Connor says.
You can also reduce your IHT exposure to make by making gifts to loved ones who are getting married, or by giving to charity.
Further gifts are known as “potentially exempt transfers” and only entirely IHT-free if you live seven more years.
Currently, you can make £12,300 of profits a year before paying CGT when selling assets such as shares, property, paintings, antiques and jewellery.
O’Connor suggested spreading disposals over multiple tax years, or making spouse or civil partner transfers, which are exempt from CGT.
Another option is to offset any losses against gains. Do your research or seek financial advice.
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