Taxman will take a bigger portion of inheritance over next five years

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The average inheritance tax (IHT) bill is already £210,000 and that is set to climb sharply after Chancellor Rishi Sunak froze nil-rate thresholds until 2026 in his Budget in March.

This will hand HMRC an extra £1billion by 2025/26, on top of the record £6billion a year it currently generates.

The move is a tax hike in disguise, said Paul Barham, partner at tax adviser Mazars: “It disregards the pace at which house price are increasing and growth shows no sign of slowing down.”

IHT is charged at 40 percent on assets above the nil-rate threshold of £325,000, which has been frozen since 2009.

Homeowners can pass on a further £175,000 of property value to loved ones under the main residence nil-rate band, which has also been frozen for five years. Families will get caught out as a result, warned Jacquetta Straker, independent financial adviser at Lycetts Financial Services: “As property and share prices rise, IHT liabilities are increasing and more estates are being dragged into the net.”

Around 22,000 estates paid IHT in the 2018/19 tax year, but this will hit almost 50,000 a year by 2026, with the bill totalling £7.6billion, according to the Office for Budget Responsibility.

Straker said do not sit idly by to discover how much your family is going to pay in IHT: “Without proper planning the biggest beneficiary of your estate could be HMRC.”

Hargreaves Lansdown personal finance analyst Sarah Coles said careful gifting can cut your IHT exposure: “Done properly, gifts will instantly fall out of your estate, plus you get to see loved ones enjoy them while you are still around.” Everyone can gift up to £3,000 to an individual free of IHT. Couples could therefore gift £6,000 this tax year. If they did not use last year’s allowance, they could gift another £6,000 on top of that.

That would shrink their estate by £12,000, potentially saving £4,800 in IHT. On top of this, you can make as many gifts of up to £250 per person as you wish free of IHT, provided you have not used another exemption on the same person.

Coles said that gifts of up to £5,000 to a child who is getting married are free of IHT. For marrying grandchildren, the maximum is £2,500 and £1,000 for anybody else.

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“You can also make IHT-free gifts out of ‘normal’ income, provided they don’t affect your standard of living,” Coles added.

All other gifts are only completely free if you live for seven years, under potentially exempt transfer rules.

The tax works on a sliding scale, falling to just 8 percent after six years.

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