Families pay £1.2 billion in needless inheritance tax

‘Liquid wealth’ is liable for high levels of the tax, but this can be reduced with planning.

Wealthy families could be hit with an unnecessary inheritance tax (IHT) bill by failing to deal with ‘liquid wealth,’ research claims.

Analysis by Weatherbys Private Bank found that almost half of the money tied up in IHT-paying estates worth £1 million or more was in cash or invested in assets such as shares in 2017-18. The total was £1.2 billion.

Everyone has an IHT allowance of £325,000 before paying tax on their estate when they pass away.

This is also boosted by a £175,000 allowance for a homeowner’s main residence, boosting the threshold to £500,000.

A husband or wife can pass this wealth on tax-free to their spouse after death, and once the surviving partner dies there is a combined £1 million that can be passed to children or others without any tax to pay.

But Weatherbys Private Bank warns a lack of planning means many of those inheriting money from assets such as shares or cash end up paying more tax than they need to.

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HM Revenue & Customs collected £5.2billion of IHT tax receipts in 2019-20 with more than 75% of the total amount being paid by people with estates worth more than £1 million.

Weatherbys says more use of tax allowances should be made to legitimately avoid IHT charges.

The taxman provides everyone with an allowance of £3,000 that they can give as gifts each year without any inheritance tax risk.

This amount can be rolled over to the following year only once.

You can also give as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption on the same person.

Additionally, each year you can gift £1,000 per person for a wedding or civil partnership present, rising to £2,500 for grandchildren and great-grandchildren or £5,000 for children.

You can also help with another person’s living costs, such as an elderly relative or a child under 18.

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Charitable donations can reduce your IHT bill from 40% to 36% if you donate more than a tenth of your estate.

You could set up trusts, or even get insurance that will payout a guaranteed lump sum to a trust, to cover a big bill.

Tax experts have warned that IHT could be overhauled as the chancellor Rishi Sunak looks to balance the books to pay for coronavirus financial support.

Debbie Wilson, a director at accountancy Hillier Hopkins, says: “Currently, inheritance tax rules allow you to make a gift of any size to friends and family members without incurring any inheritance tax liabilities if you live for a further seven years.

“Reform has long been suggested, with the Office for Tax Simplification looking at the current regime.

“We can expect change in 2021, perhaps with an immediate IHT charge on such gifts. It would be an easy change to make, facing limited opposition and could quickly be introduced.”

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