How to reduce your inheritance tax bill

tax

Thousands of families will be left worse off today when the government confirms plans to freeze the amount people can inherit free of tax to help pay for care for the elderly.

The allowance is expected to be frozen at £325,000 despite Chancellor George Osborne just eight weeks ago saying he would increase the amount in two years.

Osborne has decided the limit will not go up until at least 2019, leaving thousands of families worse off than if the threshold had increased.

The inheritance tax (IHT) freeze will help fund the introduction of a £75,000 cap on social care costs.

Being able to leave an inheritance is important to many people, and the decision not to increase the inheritance tax threshold will have financial planning implications for anyone hoping to leave money or assets to their loved ones.

Matthew Stephens, inheritance tax expert at Prudential, said:

"Plans to freeze the inheritance tax threshold until at least 2019 mean that many people could potentially face a sizeable tax bill if they do not plan ahead."

The most effective way to reduce your IHT bill is to reduce the size of your taxable estate.

The greater the value of the estate above the IHT threshold, the more IHT will be paid. Reduce the amount of the estate above the IHT threshold and save the amount of IHT you pay.

This normally means giving money away, either in one lump sum or by regular amounts, known as gifting.

Exempt gifts are free from IHT immediately and potentially exempt gifts are gifts which become exempt from IHT over time.

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