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More people caught by inheritance tax: how to avoid death duty
There has been an increase in the number of people caught by inheritance tax after the death of a loved one. Fortunately, there are easy ways individuals can reduce the bill before they die.
by Michelle McGagh on Feb 15, 2013 at 11:17
The number of people facing an inheritance tax (IHT) bill increased by 3,000 in the last tax year, with 20,000 'estates' - that's the money and assets left by a person when they die - now eligible to pay the 'death tax'.
The number of estates paying IHT in 2011/12 stood at 20,000, up from 17,000 in 2010/11. Each individual has an IHT allowance of £325,000, and £650,000 for couples; estates under this amount are not liable to IHT but estates over this amount are liable for a 40% tax on any value in excess of the threshold.
It is likely that thousands more estates will have to pay the tax as the government has just announced it will freeze the IHT threshold for the next three years in order to pay for care reforms. This rules out a 1% increase in the threshold to £329,000 announced by the chancellor in December’s Autumn Statement.
Having an IHT problem is something that most younger people can only dream about. However, the long-term rise in property values means that IHT is no longer an issue for the very wealthy.
For those who are worried their estate will exceed the threshold, plans to use generous allowances to reduce the value should be used now, said Sean McCann, personal finance specialist at NFU Mutual.
‘It is tempting to focus on annual exemptions such as investing in tax-efficient ISA accounts. However, there should be an equal amount of time and thought given to the potential 40% IHT bill loved ones could face,’ he said.
McCann urged those with larger estates to make the most of IHT tax allowances before April. In particular, he mentions the ability to gift thousands of pounds each year to steadily reduce an estate.
If you gave away a large sum of money to a family member, maybe as a deposit for a house, you would have to live for seven years after you have given the gift in order for it to fall outside of your estate for IHT purposes – these gifts are known as potentially exempt transfers.
However, you are also given annual allowances that can reduce the estate. Each year you can gift £3,000 free from IHT, and if you haven’t used last year’s allowance you can use that too, totalling £6,000. On 6 April you will get another £3,000 allowance – meaning you could gift £9,000 IHT free this year.
If a couple both give away £9,000 over the next few weeks, reducing their estate by £18,000, it would save £7,200 in IHT on death.
‘One little-known exemption from IHT is the ability to make gifts out of normal expenditure. If you’re earning more than you spend, you’re likely to be steadily increasing your wealth and potentially creating a future IHT problem,’ said McCann.
‘You can make regular gifts from your excess income, so long as it doesn’t impact on your normal standard of living. It’s a handy way of giving loved ones a regular financial lift and will help to reduce any tax bill you leave on your estate.’
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- Government extends inheritance tax to pay for long-term care
- How to avoid inheritance tax
- Can I give away my home to avoid inheritance tax?
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