Families in the UK have paid more than £5 billion inheritance tax in a single year for the first time ever.
The record figure reflects the increasing value of estates, largely fueled by rising house prices.
HMRC says that £5.1 billion was collected through inheritance tax receipts in the 12 months to May. That was a rise of 9% over the same period last year.
Figures released by the Office for Budget Responsibility (OBR) show that the number of family estates liable to tax has risen fourfold since 2010 from 10,000 to more than 40,000.
Inheritance tax is set at 40% and becomes payable once the tax-free threshold of £325,000 has been passed.
The government has recognised that more and more families are being caught by tax and has introduced an additional main residence allowance of £100,000. It came into effect in April and only applies to a person’s home, not the rest of their estate. It will rise gradually to £175,000 by 2020.
When added to the £325,000 nil-rate band for inheritance tax, this will provide a combined tax-free band of £500,000 by 2020. Married couples can combine their allowances. When one partner dies, their share of the estate can be passed on to their spouse free of any inheritance tax.
This means that by 2020, a married couple could have a combined allowance of £1m.
There are also other steps people can take to reduce the burden.
One helpful way to pass money on without inheritance tax implications is to adopt the ‘little and often’ approach. This allows you to give away £3,000 per year tax free. It’s a useful way to give money to your children without them running the risk of having to pay tax on it when you die.
There is also a ‘seven-year gift rule’ which allows a person to give money or assets of unlimited value. The recipient will not pay inheritance tax as long as the person lives for at least seven years. If the person dies within seven years of making a gift then the recipient could be liable to pay the 40% inheritance tax, depending on the value of the estate.
These are just some of the ways you could reduce inheritance tax liability. A little planning now could save your families thousands of pounds in the future.
Please contact us if you would like more information about the issues raised in this article or any aspect of inheritance tax planning.