Inheritance tax warning as average bill set to hit £233,000 – how to legally cut bill | Personal Finance | Finance

The average inheritance tax bills could reach £233,000 this year, new research suggests.

Bills have risen by nine percent, with over 30,000 families having to hand over part of their inheritance to the taxman.

Without changes to the way inheritance taxes are calculated, the number of people paying IHT could rise by 50 percent in a decade with the average bill hitting £275,000.

The number of families paying IHT could reach 34,500 as house prices increase and the frozen tax threshold remains in place, new research by Wealth Club suggests.

With the UK’s most hated tax hitting a growing number of families, there have been calls to abolish the tax altogether which the government are reported to be considering.

However, an expert has warned those families probably won’t be any better off in practice, and at the lower end might actually be worse off after the cost of living crisis.

But the government’s policy of freezing IHT allowances means they will be dragged into the taxman’s sights, nonetheless.

Nicholas Hyett, investment manager at Wealth Club said: “With IHT potentially raising over £9billion by 2029, according to our research, the government will probably decide scrapping the tax altogether is too costly.

“But, if that’s the case we would urge them to at least look at raising IHT thresholds in line with inflation.

“Whether you prefer to call it ‘fiscal drag’ or a ‘stealth tax’ the current situation is clearly unfair. If the government wants or needs to ask taxpayers for more it should be willing to make the argument out in the public.”

The amount of inheritance tax that’s required to be paid depends on the value of one’s estate which includes their home, savings, investments, and any belongings and possessions.

Understanding the rules around inheritance tax can help people reduce, or even get rid of, that tax bill.

Whether that’s using gift allowances which allow an individual to pass on money to loved ones, establishing a trust or making use of business relief the ‘right’ way depends entirely on their individual circumstances.

Taking advantage of the rules around gifting could “significantly” reduce a person’s inheritance tax bill, as this enables them to transfer wealth outside of their taxable estate.

Sam Robinson, principal financial adviser at Almond Financial explained that gifted transfers exempt from a person’s estate include:

• The £250 small gift allowance – gift £250 to as many people as you want, as long as another gift allowance has not been used on the same person
• The annual exemption – gift a total of £3,000 a year to either one person or split between several people
• Gifting from normal income – all gifts from regular salary are exempt from IHT.

There’s a special exemption from IHT for cash gifts made on or shortly before the date of a wedding, known as ‘gifts in consideration of marriage’.

According to Mr Robinson, the tax relief on IHT depends on the relationship between the gifter and the giftee:

• Each parent (including step-parents) can gift up to £5,000 tax-free
• Grandparents and great-grandparents can gift up to £2,500
• Any other person can gift up to £1,000.

No tax is due on any gifts as long as the gifter lives seven years after gifting them unless the gift is part of a trust.

He concluded: “Inheritance Tax planning is complex”. If someone is planning on passing down their hard-earned assets to the next generation, they should seek help from a professional financial advisor who can help them pass down the maximum benefit of their estate.