HMRC takes record haul from UK’s most hated tax

Inheritance tax bills rise to £179,000 each

More than £5bn was paid to the Treasury in so-called ‘death taxes’ in the last tax year, as property values continue to push thousands of Britons into inheritance tax territory.

The number of estates paying inheritance tax (IHT) has almost doubled since 2011, according to figures released by the Treasury this week, as a freeze in the IHT allowance for the last nine years has also helped tip more families into its clutches, along with increases in stock markets and even cash savings.

In 2015-16, the latest figures available, the personal possessions from almost one in every 20 deaths was liable for IHT, with each family paying an average bill of £179,000.

And as more people get caught out by life’s final taxation – charged at 40 per cent of all assets worth more than £325,000 per individual – calls for the urgent simplification of one of the most complicated set of taxation rules are growing.

“Inheritance tax is fiendishly complex and deeply unpopular. Tens of thousands of families are being hit by this tax every year despite there being some simple ways to reduce or eliminate a bill,” says Sean McCann, a chartered financial planner at NFU Mutual.

“However, we’ve seen in recent years a more aggressive approach from the taxman that has driven a surge in IHT receipts. Simplification of this tax can’t come soon enough for many families.”

“The workings may be under review but the Treasury continues to reap the dual benefits of rising property prices and frozen allowances with another year of record IHT receipts,” adds Danny Cox of Hargreaves Lansdown.

“Much of the current IHT workings are complex and distort people’s behaviour and financial decisions – the system is crying out for simplification.”

You want how much?

The essential idea is that inheritance tax is paid on any assets you leave behind when you die that are worth more than a total of £325,000. Anything above that will be charged at an eye-watering 40 per cent.

Most people assume that it won’t apply to them. But with stock market increases and property prices rising by around 25 per cent over the 10 years since the financial crisis – in some regions far more – 24,500 estates are now hit with a bill every year.

But though the death side of all this might be unavoidable, the taxation doesn’t have to be, complex though it certainly is.

Planning not to pay: how to (legally) avoid an IHT bill

“With more and more people being dragged into paying inheritance tax, people need to be savvy about making the most of the free allowances and tax breaks that the government hands you,” says Laura Suter, personal finance analyst for AJ Bell.

“Most are simple to implement and can end up saving hundreds of thousands of pounds per couple in inheritance tax.”

• Make use of the residence nil rate band

The “residence nil rate band”, otherwise known as the family home allowance, came into effect in April 2017 and gives an additional allowance on top of the usual nil rate band. In the first year, it gave an extra £100,000, but this increases by £25,000 every year until 2020. For the current year, it is worth £125,000, rising to £150,000 next April, and £175,000 in 2020.

Per couple, this means that you can ultimately save £140,000 in inheritance tax by using the new allowance. However, you can only make use of this if you’re planning to leave your home as part of your estate. This property must be a home that you lived in at some time, rather than a buy-to-let property, and you must also leave the home to your direct descendants, which the taxman classifies as your children, grandchildren, step-children, step-grandchildren or adopted children. The allowance is also reduced if your estate is worth more than £2m.

• Use all your annual gifting allowances

Normally, if you make a gift to someone from your estate, inheritance tax will be due on it if you die within seven years, at a reducing rate. But everyone has various amounts that they can gift to people annually, where this seven-year rule does not apply.

Each person can give away £3,000 every year, and what’s more, if you haven’t used the previous year’s allowance, you can carry it forward to this year. You can also gift money for a wedding: £1,000 per person, or £2,500 for a grandchild or great-grandchild, and £5,000 for a child. You can also make regular gifts out of your income that are IHT-free, as long as they don’t affect your standard of living. On top of this, you can give up to £250 per person in a year, as long as you haven’t used one of the other exemptions on that person in that year.

• Use up ISA money before using pensions

Any money held in your ISA on death is counted as part of your estate for IHT purposes, and so it counts towards your £325,000 limit. However, with pension money, the full value can be passed to a beneficiary inheritance tax-free if the pension-holder dies before the age of 75. If they die after 75, the pension will still be IHT-free, but the beneficiary will pay tax on any income taken, or up to 45 per cent if they take a lump sum. Therefore, it’s more tax efficient to use up your ISA money before you die and before using up your pension pot.

• Invest in AIM shares

You can invest in shares listed on the AIM stock market, and some are eligible for Business Property Relief, which has IHT benefits. This means that as long as you hold the shares directly and for at least two years, they will be exempt from inheritance tax. You must make sure that the AIM shares you invest in are eligible for BPR, as not all are.

Source: AJ Bell.