Inheritance tax payments have been increasing due to rising house prices and an overall rise in family wealth and investment.
The latest figures from HM Revenue and Customs show that just over £3 billion was collected in inheritance tax in 2013, an increase of 15% on the previous year and the highest figure since 2008 at the beginning of the recession.
Financial experts believe the increase is due to rising house prices and the increased value of investments pulling more families into the inheritance tax arena.
The inheritance tax threshold has remained at £325,000 since 2009. It’s due to be increased in 2017 but it’s feared the rising value of people’s overall assets is likely to cancel out much of the benefit.
Thankfully, there are several steps people can take to reduce the burden of inheritance tax.
One of the most obvious ways for committed couples to reduce inheritance tax is to get married. When one partner dies, their share of the estate will then be passed on to their spouse free of any inheritance tax.
In addition, any unused tax allowance will also be passed on to the surviving spouse.
This means that if a person dies and their share of an estate is worth £250,000, their spouse will be entitled to the remaining unused allowance of £75,000, giving them a total allowance of £400,000 based on current figures.
However, it isn’t a set figure that is passed on but a percentage.
In effect, this means that if a person dies and their assets only account for 50% of their allowance, the other 50% is passed on to the survivor. This percentage will then apply even if the inheritance tax allowance rises at some point in the future. So, for example, if the allowance rises to £500,000, the 50% will be worth £250,000.
Another 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 enables one person to give money or assets to another. 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.