Inheritance tax receipts are set to increase by more than 20% this year, according to the Office for National Statistics.
The latest figures show that death duties are on track to bring in £4.6 billion in the 12 months to February. That compares with the £3.8 billion for the same period last year.
Rising house prices are thought to be the main reason for the increase. There have also been more deaths than usual among the elderly due to the flu virus that was prevalent last winter.
Inheritance tax is set at 40% and becomes payable once the tax free allowance of £325,000 has been passed.
An additional main residence allowance of £100,000 will be introduced in April 2017. This will rise gradually to £175,000 by 2020.
When added to the £325,000 nil-rate band for inheritance tax, this will eventually 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 is 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.
Inheritance tax is one of the most unpopular taxes as it reduces the amount of money people can pass on to their children. Fortunately, there are 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.