Will your hard earned money be lost to inheritance tax?

The rising value of houses could turn inheritance tax into a major issue for thousands of families across the UK

The problem is that the inheritance tax threshold has been frozen at £325,000 until 2018; by that time, house prices are expected to have risen by 25%  

It’s likely therefore that many people will find they own properties and other assets which take them above the £325,000 threshold. It means that when they die, much of the wealth they have worked hard for all their lives could go to the taxman instead of their families.

Thankfully, there are several steps people can take to reduce the burden of inheritance tax. 

One of the most obvious ways for committed couples to reduce inheritance tax is to get married. When one partner dies, their share of the estate will then be passed on to their spouse free of any inheritance tax.

In addition, any unused tax allowance will also be passed on to the surviving spouse.

This means that if a person dies and their share of an estate is worth £250,000, their spouse will be entitled to the remaining unused allowance of £75,000, giving them a total allowance of £400,000 based on current figures.

However, it isn’t a set figure that is passed on but a percentage.

In effect, this means that if a person dies and their assets only account for 50% of their allowance, the other 50% is passed on to the survivor. This percentage will then apply even if the inheritance tax allowance rises at some point in the future. So, for example, if the allowance rises to £500,000, the 50% will be worth £250,000.

Another way to pass money on without inheritance tax implications is to adopt the ‘little and often’ approach. This allows you to give away £3,000 per year tax free. It’s a useful way to give money to your children without them running the risk of having to pay tax on it when you die.

There is also a ‘seven year gift rule’ which enables one person to give money or assets to another. The recipient will not pay inheritance tax as long as the person lives for at least seven years. If the person dies within seven years of making a gift then the recipient could be liable to pay the 40% inheritance tax, depending on the value of the estate.

These are just some of the ways you could reduce inheritance tax liability. A little planning now could save your families thousands of pounds in the future.

Please contact Josie Birnie if you would like more information about the issues raised in this article or any aspect of inheritance tax planning.