Millions risk huge inheritance tax bill due to misunderstanding of rules

As more people are being caught in the inheritance tax net, an expert has explained how to mitigate losses and spare loved ones a huge bill once they’ve passed away.

Around £38billion will be raised over the next five years from inheritance tax, with receipts rising to a hefty £8.4billion in the 2027/28 tax year.

Some 16.4 million people are at risk of paying the tax as they are unaware of whether or not their families could be left to pay a bill when they pass away, research from abrdn shows.

Their financial experts stated: “Understanding the rules around inheritance tax can help you reduce, or even get rid of, your tax bill”.‌

Despite seven in ten Britons thinking inheritance tax “should be abolished” due to its archaic and complicated nature, they are urged to equip themselves on their rules as misunderstanding has led to a huge bill for loved ones.

Jonathon Jay, partner with DSW Wealth Planning, explained the “best ways” to mitigate losses and reduce the bill on loved ones.‌

He said: “The simplest and most cost-effective way to reduce your IHT bill is to spend the money you have.

“Typically, you will have a liability to IHT because you have accumulated more than you have spent, so it may be time to turn that around and enjoy the money you’ve saved while you can.”

Additionally, he suggested that before giving money away, it is important to consider how much people can afford to give without affecting their standard of living, and whether they need some control over what is given.‌

He continued: “You can give to family or friends directly, but if you would like to remove more from your estate and control how and when it is distributed, a trust arrangement may be more appropriate.‌

“Please note, gifts are typically subject to inheritance tax if you do not survive seven years after they are made. Some gifts are classed as exempt transfers and others are potentially exempt.

“Trusts and gifting methods for inheritance tax purposes are complex in nature and you should seek professional advice to understand how they could work for you.”

Britons can also gift to charity. Regardless of size, charity donations are not subject to inheritance tax and if the amount they gift to charity via their will exceeds 10 percent of their net estate’, they could reduce your inheritance tax rate from 40 percent to 36 percent.

Their net estate is the total estate value less their Nil Rate Band entitlement of £325,000 per individual (£650,000 for married couples or civil partnerships).