Inheritance Tax bills are rising. What can you do about yours?

What is the average IHT bill?

Latest HMRC data shows that the average IHT bill rose by £5,000 in 2013, when just under 18,000 estates (the largest number since 2008) paid over £3.05 billion. That’s an average individual bill of £170,000. The increase was due to a combination of rising house prices (which have increased by 21% since 2009 according to the Nationwide) and a tax-free allowance or ‘nil-rate band’ of £325,000 that has been frozen since 2009. Not surprisingly, more than half of the estates that had to pay IHT in 2013 were from those who had property in London and the South East

What is Inheritance Tax exactly and how is the tax-free allowance changing?

Inheritance Tax (IHT) is a tax on the estate (money, investments, property or possessions) that you leave behind when you die. It also applies to some gifts you may make while you are still alive. A certain amount can be passed to your inheritors without being taxed; this is known as the ‘nil-rate band’ which is £325,000 (£650,000 for couples) for 2015-2016. It will stay that way until at least 2020-2021. George Osborne announced in July 2015’s Summer Budget that he intends to scrap IHT when parents or grandparents pass on a home that is worth up to £1m (£500,000 for single people). This will be phased in gradually between 2017 and 2020. This means that the rise in IHT bills could start to slow in the coming years, although not until 2017 at the earliest.

We talk about the effects that this new ‘main residence nil-rate band’ will have as part of our blog about the writer PD James.

So what can you do in the meantime?

Money given away before you die is subject to IHT if you die within seven years of giving the gift. So one tip is to give substantial gifts at a time when you are confident of surviving more than seven years. Early planning of how to pass on your assets is important. This is an area where you do need specialist advice.

However, even if you do die within seven years of making a gift, there are several other exemptions worth taking into account to help reduce your estate’s IHT bill, including:

1. You can give £3,000 away each tax year inheritance tax-free
2. You can give a further £5,000 to a child – £2,500 to a grandchild or great-grandchild – if they are getting married.
3. Gifts to charities and political parties are inheritance tax-free.
4. You can give £250 each year, inheritance tax-free, to everyone you know, as long as the recipient hasn’t already benefitted from one of the other gifts mentioned above.
5. You can also give away as much as you like from your income without it potentially being liable for inheritance tax. You do have to prove you have enough income left to maintain your normal lifestyle.

Inheritance Tax Calculator

This calculator (a link to the ‘This Is Money’ website) is handy way of working out your approximate inheritance tax (IHT) liability until the rule change in 2017. But it doesn’t show you how to use financial planning to mitigate the ultimate tax bill your estate will have to pay. You need an independent financial advisor for that. Link to Calculator

Next steps

If you feel that inheritance tax (IHT) planning is something that you or your family need, you should make sure that you consult an expert in the field. If you would like to find out more about the financial decisions you should take now to reduce a possible IHT bill, please contact Marchwood IFA. We can liaise with a solicitor to help you draw up a will that protects your family’s future.