Increasing numbers of Britons are being hit by inheritance tax (IHT) bills as house prices and other asset prices increase.
A person has to pay the 40 percent tax on any total inherited assets above the value of £325,000 from a single person or above £650,000 from a couple.
It’s important for families to plan ahead as an inheritor can otherwise get a surprise bill for thousands of pounds when a loved one dies.
Shona Lowe, financial planning expert at abrdn, explained: “The amount of inheritance tax that’s required to be paid depends on the value of your estate.
“And your estate is everything you own, including your home, savings, investments, and any belongings and possessions.”
Research from the group found over 70 percent of Britons think IHT should be abolished with more than a third thinking the levy is unfair.
Fortunately, there are several ways a person can reduce their liability in arranging their finances.
Ms Lowe shared some tips for reducing the IHT bill they will leave for their friends or loved ones.
One tip is to look at making IHT-exempt gifts to reduce the size of a person’s estate. An individual can give away up to £3,000 a year divided among any number of people.
People can also give away any number of gifts up to £250 to different people during a tax year.
Ms Lowe said: “You can also give away any extra income you have that you don’t need to fund your current lifestyle, provided it’s a pattern of gifting and again, the value of those regular gifts will leave your estate immediately.
“If you give a gift that doesn’t fall within one of those exemptions, you will need to survive for seven years after giving it in order for its value to leave your estate completely.”
She also suggested looking at setting up a trust to take on part of a person’s estate when they die, meaning it will not be considered part of their estate for IHT purposes.
These can be very complex to set up so it’s important to seek financial advice in creating one.
Another tip from Ms Lowe is to consider how inheritance tax is paid and who will be responsible for paying for what.
She said: “If you have a will, the responsibility for working out how much inheritance tax is payable falls to your executors.
“The tax is then generally paid from the estate before it is passed on to your beneficiaries. However, if the tax is payable because of a gift you made while you were alive, the person who received that gift will generally have to pay that inheritance tax.
“If you don’t have a will, it will be payable by the person appointed to administer your estate, again from the estate itself.”
If a person dies with money in a bank account, the Direct Payment Scheme (DPS) can allow a portion or the entire tax to be paid directly from that account.
A person can also get the money to pay for the tax by selling investments or property.
An IHT bill usually has to be paid within six months of the date of the person’s death, after which interest will be charged on the outstanding amount.
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