Inheritance tax receipts at record high

Middle aged man wearing dark framed glasses doing paperwork at kitchen table.

"Nothing can be said to be certain, except death and taxes" said Benjamin Franklin, but while there’s nothing any of us can do about the former, there are steps you can take to legitimately reduce your tax bills.

Record inheritance tax (IHT) receipts highlight the importance of planning your estate, with HMRC having collected record £5.1bn from IHT in the year which ended May 2017.

The threshold at which IHT is payable has been frozen since 2010, which means increasing numbers of families now face a tax bill when their loved ones die.

The number of families paying IHT has increased by 160pc between 2010 and 2016, with data from the Office for Budget Responsibility showing that that 40,000 families paid IHT in the 2015/16 tax year.

How IHT works

IHT is payable at a rate of 40% on the value of your estate above £325,000, or £650,000 if you’re married or widowed.

Your estate includes the value of your home, minus your mortgage, as well as all your other possessions, such as your car, jewellery, antiques, art and so on.

Many people assume everything they own will be worth less than the current threshold, but rising property prices have pushed more and more estates above the £325,000 threshold.

Since April this year, an additional main residence nil rate band allowance has begun to be phased in. It is currently worth £100,000 but will eventually rise to £175,000 per person by April 2020.  However, not everyone will be able to benefit from the new allowance, as you can only use it if you are passing your home to your children or grandchildren. If you don’t have any direct descendants, you won’t qualify for the allowance.

Way to avoid leaving your family with a potential tax headache

Even if you don’t qualify for the family home allowance, there are still plenty of things you can do to help reduce any potential IHT liability.

For example, there are various allowances available which allow you to make gifts free of IHT every year.

You can give up to £3,000 away each tax year, so couples can give away £6,000 between them. You can also give as many £250 gifts per person as you want each tax year, but you can’t give one of these to anyone you’ve already given your £3,000 allowance to.

Bear in mind that IHT planning is a complex area, so if in doubt you should always seek professional financial advice. Remember too that tax rules can and do change over time, so it’s important to regularly review your position and how current legislation affects you.

Benefit from tailored inheritance tax planning with The Telegraph’s Inheritance Tax Advice service.

The above article was created for Telegraph Financial Solutions, a member of The Telegraph Media Group. For more information on Telegraph Financial Solutions click here.