The taxman is set to rake in a record amount of inheritance tax (IHT) this year, yet many of us fail to make use of allowances and exemptions which could reduce potential bills.

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Latest HMRC data shows that that inheritance tax receipts reached an eye-watering £4.1 billion between April and October 2022, which is £500m more than in the same period a year earlier.

The current inheritance tax threshold of £325,000, above which tax becomes payable at a rate of 40%, has been frozen at this level since April 2009, but was due to be reviewed in 2026. In his Autumn Statement, the Chancellor Jeremy Hunt announced that it will be frozen for a further two years until April 2028, meaning more people will fall into the inheritance tax net, especially as property prices in many areas of the country have risen sharply in recent years.

Alex Davies, chief executive and founder of investment service the Wealth Club said: “Contrary to what many think, inheritance tax doesn’t just affect the super-rich. It will be the thousands of hardworking families that will bear the brunt. Rampant inflation, soaring house prices and years of frozen allowances will magnify the tax take in the years ahead. More and more families are going to find themselves hit by death duties they might not expected or planned for.”

According to estimates from the Office for Budget Responsibility, the freezing of the threshold for another two years is likely to bring in more than an additional £1 billion for the government by the 2027/28 tax year. Stephen Lowe, group communications director at retirement specialist Just Group, said: “Frozen tax thresholds and rising property prices have combined to create a ready flowing source of cash for the government from this often-overlooked tax.

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“Our recent analysis found that over 55s have seen their property wealth grow by £1 billion a day between the start of the pandemic and June 2022, reaching a total value of around £4.4 trillion. It’s likely many homeowners are unaware of the tax sting in the tail of this property windfall.”

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Despite the risk that they could leave loved ones facing a hefty tax bill when they die, fewer than one in four (22%) people aged between 55 and 64 know what their inheritance tax liability will be on their estate, according to a new study by estate planning services provider TIME Investments.

Less than one in 10 (8%) in this age group said they’ve taken steps to ensure they don’t pay more IHT than they need to, even though 30% estimate that their estate would be worth more than the current £325,000 nil rate band.

Make the most of allowances and exemptions

There are several perfectly legitimate steps you can take to minimise inheritance tax bills.

First, make sure you have a will in place, so that you have peace of mind that your assets will be distributed to who you want them to.

You should also make use of annual allowances. You can give up to £3,000 away every year tax-free, known as your annual exemption. If you haven’t used last year’s allowance, you can carry it forward to this tax year, and give away up to £6,000. You can also give up to £250 each year to however many people you want (but only one gift per person each year). There is a wedding gift allowance too, so you can give up to £5,000 to your child if they are getting married or entering a civil partnership, up to £2,500 to your grandchild, or up to £1,000 to anyone else.

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Ian Dyall, head of estate planning at UK wealth management company Evelyn Partners, said: “Larger gifts can obviously be made – and without issue as long as the donor then survives for seven years, during which time such gifts remain ‘potentially exempt transfers’.”

If you can afford to, you can make regular gifts from your income free of inheritance tax. There’s no limit on how much you can give away, as long as you can prove that your standard of living is not affected.

Another way to reduce any potential inheritance tax liability is by leaving a legacy to charity in your will.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown said: “This has two potential benefits. The first is that any money given to charity isn’t counted when your liability for inheritance tax is assessed. The other is that leaving money to charity in a will can reduce the rate of inheritance tax you pay from 40% to 36%. To qualify you have to give at least 10% of the portion of your estate that is subject to IHT to charity.”

Inheritance tax rules can be complicated, so it’s worth seeking professional advice if you’re not sure how best to keep IHT bills to a minimum.

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