‘Key’ inheritance tax considerations to note when passing on wealth
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The Treasury raked in £5.3billion in inheritance tax (IHT) receipts in the months from April to December 2022. This is £700million more than in the same period a year earlier, continuing the upward trend, new figures from HMRC show.
With more and more families falling foul of the disliked tax, Dawn Mealing at Fidelity International spoke exclusively to Express.co.uk on how families can pass on wealth without paying out a hefty sum.
The Government’s IHT take seems to be increasing largely due to years of house price increases, especially in London and the south-east, pushing families that wouldn’t probably consider themselves wealthy over the threshold.
Inheritance tax of 40 percent is usually chargeable if one’s assets exceed a certain threshold, after deducting any liabilities, exemptions and reliefs.
The threshold (nil rate band) has been £325,000 per single person since April 6, 2009 – and will stay frozen at this level up to and including 2028-29.
Ms Mealing explained the key considerations when passing on wealth to loved ones, especially in this economic climate.
Keep an eye on ‘inflation erosion’
With IHT thresholds currently frozen, and inflation at record-levels, more estates are likely to get caught by the 40 percent IHT tax rate – meaning potential disappointment for those thinking of gifting their assets as an inheritance.
To gift or not to gift
Gifts up to £3,000 per annum can be made free of IHT. Any gift in excess of £3,000 will become a potentially exempt transfer.
She said: “It will remain IHT-free if you survive for seven years after making it. If you die within the seven-year period, the gift will become subject to IHT.
“It is also worth noting several annual exemptions for gifts; each tax year you can also give away wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child), and £250 per person per year assuming none of the other exemptions have applied to the recipient within that tax year.
“Anything in excess of these limits is considered a Potentially Exempt Transfer (PET), at which point the seven year rule will apply.”
Pensions aren’t included when IHT is calculated. Using other assets to fund one’s retirement means pensions can be passed on tax-free while gradually reducing the size of the taxable estate.
Surplus sums and regular gifts
Ms Mealing explained that surplus income left to accumulate increases the value of the estate.
It could be effectively used to fund children’s pension contributions, mortgage payments or, life insurance or illness cover.
She added: “Regular gifts from surplus income must be regular, payable from income and not affect the donor’s standard of living to qualify as IHT exempt.
“This can also apply to grandparents who want to use any surplus income to funds Junior ISA/Junior SIPPs for their grandchildren.”
CGT vs. IHT
Ms Mealing continued: “IHT is a tax on the value of a deceased’s estate. Capital Gains Tax (CGT) is a tax on profit.
“Gifting an asset during your lifetime may mean both taxes interact with expensive consequences.
“Paying CGT now to save IHT later may not make financial sense. If you are planning a large gift, seek advice.”
Gifting to charity
If someone leaves at least 10 percent of their net estate to a charity or a few other organisations, they may be able to get a discount on the IHT rate – 36 percent instead of 40 percent – on the rest of their estate.
People don’t have to donate a fixed sum of money. They could give away a proportion of their estate or specific items, such as an antique, a piece of jewellery or a work of art.
They could also leave a reversionary gift, which first passes on to a loved one and then to the charity after they die.
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