Families who may have to pay inheritance tax in future have been urged to read up on the rules.
The 40 percent tax applies to total inherited assets above certain thresholds – but there are several things people can do with their finances to bring down how much tax an estate is liable for.
Megan Jenkins, partner at Saltus, said: “Mitigating inheritance tax (IHT) is high on many people’s financial objectives, and while there are many ways to reduce IHT liability, they must be done right – any mistakes can not only impact the effectiveness of any tax planning, but potentially leave the estate open to an unexpected IHT bill.”
She said one of the biggest mistakes people make is not understanding the thresholds for paying the tax.
Each individual is entitled to a nil rate band of £325,000 and a residence nil rate band of £175,000 if a person is passing on their home to a direct descendant.
These allowances are doubled for couples meaning a person inheriting an estate from a couple will have a nil rate band up to £1million.
Another common mistake people make with regard to inheritance tax is not having a will in place, or having an out of date one.
Ms Jenkins said: “A will is a way to control how the estate is distributed and ensure no unnecessary IHT is due. Assets passed between spouses are entitled to an exemption for IHT, therefore it is important to have an up to date will to ensure you are able to make use of this.
“Without one, children would share in part of the estate and depending on the value of the assets, there could be a potential inheritance tax liability.”
A third common mistake is for people to not understanding how IHT-exempt gifts work, particularly regular gifts.
Ms Jenkins explained: “To be classed as a ‘gift out of regular income’, the gift must come from ‘surplus’ income not ‘capital’ and must leave the person making the gift able to preserve their standard of living.
“Therefore, if making the gift results in the person having to draw upon capital to make up for it, it wouldn’t qualify. The gifts must also be regular, for example, a monthly contribution into a grandchild’s savings account.
“Many people make these types of gifts but falter to keep an ongoing record of them. To make use of this exemption it’s important to keep a record so the executors of the estate have evidence.”
A person can give away up to £3,000 each year and avoid the tax, as well as giving away any number of gifts up to £250, to different people.
Individuals can also give away larger gifts but they will need to survive for seven years for these amounts to avoid the tax.
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