Inheritance tax, which has been coined the ”death tax”, is infamously the UK’s most hated tax. Inheritance tax is payable on the estate of someone who has died; usually, it is the deceased’s family who has to pay it. The current nil-rate band threshold is £325,000 per individual which means anything over this amount will be taxed at 40 percent.
No inheritance tax is paid if the estate is worth less than the threshold.
Money experts often advise people to plan in advance in order to prevent their loved ones from receiving a massive tax bill.
There are several ways in which people can reduce the value of an estate and one of the “easiest” ways is gifting whilst a person is still alive.
According to the rules, people can give away a maximum of £3,000 every year without paying tax on it.
This is known as a person’s “annual exemption” and the £3,000 can be given to one person or can be split between several people.
Couples can combine their allowances which means they are able to give away £6,000 without paying tax.
People can also give as many gifts of up to £250 per person as they want each tax year, as long as they have not benefited from the £3,000 limit.
Birthday and Christmas gifts which are given from a person’s regular income are exempt from inheritance tax.
Parents can also gift £5,000 if any of their children are getting married, £2,500 to a grandchild or great-grandchild on marriage, and £1,000 to another relative or friend.
However, there is a catch with gifting, and it is called the seven-year rule.
No tax is due on any gifts a person gives if they live for seven years after giving them, however, if the person dies within the seven years there is a tax to pay.
Gifts which are given within three years before the death are taxed at the full 40 percent.
Shaun Moore, tax and financial planning expert at Quilter said: “Planning your finances to ensure you pass on your wealth in the most tax efficient manner can be very beneficial as more of your money goes to your loved ones instead of the taxman.
“While many people may believe they are doing the right thing by holding off on passing on their wealth via a big one-off lump sum until after their death, it may be a good idea to consider the ways in which you can support your family now and also reduce the burden of inheritance tax.
“Lifetime gifting is an important aspect of inheritance tax planning, and it allows you to have more control over where your money ends up. As such, it can be a great way to make the most of your financial assets while also getting to enjoy seeing your savings help your family prosper.”
In 2021 the UK Government collected a record £5.9billion. This is an increase on the £5.2billion which was collected in 2020.
The expectation is that the takings for the tax is to continue to increase over the next few years and more and more Britons are going to be dragged into paying.
This is due to rising inflation, spiralling house prices, and the freeze to the nil-rate band until 2026.