Inheritance tax (IHT) bills are soaring as Jeremy Chancellor Jeremy Hunt freezes thresholds all the way to 2028, with HMRC taking a record £795million in June alone. Annual bills set to hit £8.4billion in just four years, unless Hunt bows to pressure and axes the hated death tax in this month’s Autumn Statement.
Sadly, gifting allowances have been frozen too, shrinking their value in real terms, but this makes it even more vital to make maximum use of what’s available, said Faye Church, chartered financial planner at Investec Wealth & Investment (UK).
“Giving money for Christmas can be the gift that keeps on giving for families by boosting financial security for children and grandchildren, while minimising potential tax bills for parents and grandparents. Plan carefully to make gifts as tax efficient as possible.”
No tax is due on the first £325,000 of any estate but that rises to £500,000 if a property is left to children or grandchildren, for estates under £2million. Married couples and civil partners can therefore leave up to £1million tax-free.
“Gifting to children or grandchildren could be a tax-efficient way to improve their financial security, help pay university tuition fees, shrink their student loans or get them on the property ladder,” Church said.
Options range from simply gifting spare cash to investing in a Junior Isa or setting up a bare trust, she added. “This means you will get to see your loved ones enjoy the money today.”
Every year, you can gift £3,000 to anybody they choose, with instant IHT exemption. Couples could therefore gift £6,000 in total.
If you did not use last year’s gift allowance, you could give £6,000 in total (rising to £12,000 for couples). Assuming that every penny was subject to IHT at 40 percent, the tax saving would be £4,800.
You can also give unlimited gifts of up to £250 to any number of people, provided they haven’t benefited from the £3,000 exemption.
Parents can also gift £5,000 to children on marriage, £2,500 to a grandchild or great-grandchild who is marrying, and £1,000 to another relative or friend.
In a little-known exemption, gifts paid out of surplus income, which are not deemed to affect your standard of living, are IHT free. “The gifts cannot come from capital,” Church said.
These could include regular payments into a children’s savings account, or paying a life insurance premium for your spouse or civil partner.
If feeling charitable at Christmas, donating 10 percent of your net estate will reduce the IHT rate on your remaining estate from 40 per cent to 36 percent.
It is also possible to make much larger gifts, known as potentially exempt transfers. The IHT charge reduces on a sliding scale the longer you live until it falls to zero after seven years.
Keep a clear record of all the gifts you make, to avoid disputes with HMRC, and consider taking specialist advice, Church added.
READ MORE: Jeremy Hunt mulls major inheritance tax cut ahead of Autumn Statement
As our exclusive online inheritance tax guide explains, IHT was originally targeted at the super-wealthy but many now escape because they can afford to hire expensive financial advisers to discover tax loopholes.
Increasingly, middle-income Britons bear the burden. Yet many fail to take simple steps that could save them thousands, in part because the rules are so complex.
IHT is charged at a punitive 40 percent for all liable assets, so the bill can quickly run into tens or even hundreds of thousands of pounds.
Last year, 33,000 estates paid IHT, up by a third according to the OBR, with the average payment around £160,000. Some hand a lot more than that to HMRC.
In July 2019, the Office for Tax Simplification (OTS) suggested a number of rule changes to make IHT fairer and easier to understand. So far, little has been done.
If you want to cut your family’s IHT bills, you have to take action yourself. This Christmas could be the last one before Labour leader Keir Starmer takes the keys to number 10, after which IHT may become even more punitive.
Take this seasonal chance to cut your exposure and give younger family members a Christmas to remember.
DON’T MISS: Your expert guide to inheritance tax – from what it is and who pays to how to reduce it
