The subject of inheritance is one that many people put off, but failing to plan effectively could mean loved ones are left with a hefty inheritance tax (IHT) bill. Paul Scarff, chartered financial planner at Succession Wealth, spoke exclusively to Express.co.uk and discussed some of the options people have to reduce their bill.
Mr Scarff explained that although inheritance tax used to be considered a tax reserved for the wealthy, with rising property prices, more families could be left facing a bigger tax bill.
He said: “The latest figures from HMRC have revealed a £600million year-on-year increase in inheritance tax (IHT) receipts in the first half of 2021/22.
“Unfortunately, this means that as inflation continues to rise, more families will be subject to an IHT on estate worth more than £325,000, including property, money, and possessions of a loved one who has died.
“Those who own their own home may receive an additional relief of up to £175,000.”
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“Secondly, the standard rate of inheritance tax is 40 percent, which can significantly reduce what you leave behind. If you choose to leave 10 percent or more of your estate to charity, the rate of inheritance tax will fall to 36 percent.
“Depending on the size of your estate, this reduction can mean you leave more to loved ones while lending financial support to a charity too.
“If you want to use a charitable legacy to reduce inheritance tax, this must be included in your will. A charitable legacy can be a fixed amount, what’s left after other gifts have been given, an item or a percentage of your estate.”
Gift to family and other individuals
An individual giving a gift to family or friends while they are still alive may be another way to lower the value of an estate for inheritance tax purposes while also providing a benefit to their loved ones.
By making use of the annual gifting allowances, it is possible to give someone up to £3,000 in total each tax year.
Mr Scarff continued: “If you didn’t use your annual exemption in the previous tax year, you could pass on £6,000 – however, you can only carry forward the exemption for one tax year.
“Parents can also give their children who are getting married gifts worth up to £5,000 without impacting their other allowances, whilst grandparents can give up to £2,500.
“When making these gifts, it is equally important to keep a good record of who you gave the gift to and how much. This will make it easier for the executor of your estate to work out during probate what parts of your estate are liable for tax.
“If you are in any doubt about how gifts might affect your inheritance tax position, you should take professional advice, particularly as some of the rules can get quite technical.
Starting a Trust Fund
Another popular inheritance tax planning strategy is to pass on assets into a trust, which is a type of legal arrangement where a person gives cash, property, or investments to someone else, known as a nominated trustee.
The nominated trustee has legal opportunity to manage the assets on behalf of the chosen beneficiaries.
Some people decide to put some of their savings aside in a trust fund for their children or grandchildren.
Ms Scarff said: “However, it is important to note that if the estate being passed on exceeds the deceased’s IHT allowance, you may have to pay a 20 percent charge on all assets when they were originally put into the trust.
“Additionally, when the trust is closed or the beneficiaries remove the assets, another tax charge is applied of up to six percent, depending on when the most recent 10-year valuation took place.
“Given the complex structure of Trusts, it is highly recommended that people take professional advice to understand all the legalities.”
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