A recent survey found Inheritance Tax (IHT) to be Britain’s most hated levy. One in four picked it as their bête noire — which is odd, because at the moment only one in 20 estates pays it. And, as I often say, you’re already dead when it’s collected!
One reason may be that more of us – or rather our heirs – will pay it The Office for Budget Responsibility predicts that the number paying IHT will rise, giving the government an extra £2 billion a year by 2026/27 (though even then, only one in 15 estates will pay IHT). The increase is due to two things. First, property prices are rising and your home is normally the biggest asset you leave. Second, the threshold at
which it starts has been frozen at £325,000 since 2009, and won’t rise again until 2026 at the earliest. That could mean that more estates
exceed the limit and pay the tax.
There is good news, though. Since 2020, up to £175,000 of the home you live in is free of IHT if you leave it to your child or grandchild. That can make a total of £500,000 tax free. And there are ways to lessen tax due:
- Leave everything to your spouse or civil partner. No tax is due when you die – they get it all tax-free. When they die, their heirs get a double allowance and inherit £650,000 tax-free plus up to £350,000 for the value of a home they live in – £1 million tax-free.
- You can give any amount from your surplus income, as long as your way of life is not reduced, without it counting for IHT.
- You can give away a total of £3,000 a year without it counting (and up to £5,000 as a wedding gift), plus amounts of £250 a year to any number of people.
- Have a pension fund? Specify who gets it when you die. It’s outside your estate and not subject to IHT. Ditto life insurance policies.
- You can give away any amount if you live for seven years after making the gift – so stick around!
Paul Lewis presents Money Box on Radio 4.