Inheritance tax warning as families risk being hit with ‘unexpected bill’

HMRC announced that Inheritance Tax receipts for April 2023 were £0.6 billion. This is £0.1 billion higher than in the same period a year earlier.

This means more people are getting caught in the tax trap, losing more of their hard-earned cash.

Britons are being warned about an “unexpected” IHT bill, with almost three in four people in the UK over the age of 50 unaware of the rules around the levy.

‌A new survey from independent financial advisory firm deVere Group has revealed that 72 percent aged 50-plus and with taxable assets did not know the IHT threshold was £325,000.

The inheritance tax nil-rate band, which is the maximum amount a person can inherit before paying IHT, has been frozen at £325,000 since 2009 – despite soaring house prices.

Recent figures show that there has been a 24 percent surge in the number of people paying inheritance tax in the 2022-23 financial year, which is nearly double what it was in the 2018-19 tax year.

‌The Government’s IHT take seems to be increasing thanks largely to years of house price increases pushing families that wouldn’t probably consider themselves wealthy, over the threshold.

Nigel Green, chief executive at deVere Group told Mortgage Introducer: “It’s very worrying that those with assets that could be raided by IHT had a lack of understanding about what is likely to happen.

“It puts these people’s families at risk of being hit with an unexpected, and potentially considerable, tax bill at the point of the death of a loved one.

“It’s even more troublesome as, in our experience, people feel so strong about inheritance tax: it is the most hated of all taxes.

“People despise the idea of money that they’ve already paid tax on being taxed yet again.

“It’s a human instinct that they would rather their loved ones benefit from their legacy than it being taken by the Government.”

‌With HMRC bringing in a record amount of income from IHT, now is the time for people to make sure they are clued up on the rules around gifting and they know how to cut their liability.

Daniel Tomassen, senior manager at accountancy firm HW Fisher explained three ways to avoid being caught out.

He said: “Keeping things simple is the name of the game! If a married couple is considering making a gift, consideration should be made as to whether just one of them should make the gift. Typically you see the spouse who is in better health or younger making the gifts as they are more likely to survive seven years.‌

“Alternatively, to spread the risk then they may decide to each make a gift of 50 percent. This way the chances of at least one of the spouses surviving seven years is higher and therefore more likely that at least 50 percent of the total gifted amount is likely to fall out at least one of their estates for Inheritance Tax purposes.

“Consideration should be made as to whether a ‘gift inter vivos’ insurance policy should be taken out. For an annual premium the policy will cover the Inheritance Tax payable on the gift should they not survive seven years.

“This provides peace of mind to the executors of the estate who may not have sufficient liquidity to settle the Inheritance Tax bill on the gifts.”

Mr Tomassen added: “Keeping a clear record of gifts made can make life easier for the individuals dealing with the estate and calculating the Inheritance Tax payable.‌

“The deadline for HMRC enquiries for Inheritance Tax is significant and therefore good records can ensure the executors pay the correct amount of Inheritance Tax and minimise the chances of late payment interest and penalties being levied by HMRC.”