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15% increase in number of families facing inheritance tax bill this year

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Rising inflation and property prices mean more families will have to pay inheritance tax (IHT) this year.

The number of UK estates paying so-called ‘death tax’ is set to rise by 15% to 30,000 this tax year, according to analysis of HMRC data.

Some 26,000 estates were hit by IHT in 2015/16 and the overall number has shot up from just 16,000 in 2008/09.

Law firm Wilsons, which carried out the analysis, said the rise was down to the government’s decision to freeze the nil-rate limit at £325,000 until at least 2019.

Rising inflation and property prices have pushed the value of many non-qualifying estates over the IHT threshold, Wilsons said.

In a move to counterbalance rising numbers of IHT-qualifying estates, a new residential nil-rate band will be introduced from 6 April 2017, in effect protecting peoples’ homes from IHT.

The new nil-rate band will be phased in gradually so that by 2020/21, individuals will be able to pass on an extra £175,000 of residential property to their direct descendants free of IHT. This will raise the total IHT threshold to £1m for a married couple.

Tim Fullerlove, partner at Wilsons, said: “The Government’s decision to freeze the nil-rate band until at least 2019 means many more families are likely to find they qualify for IHT in the coming years.

“This is because inflation and rising house prices are not being complemented by a rising nil-rate band. Estates that would in no way have in the past are now being subjected to the 40% tax IHT imposes.

“The figures drive home the huge importance of careful inheritance planning for everyone. This is something that no longer applies to high net worth individuals only.”

What can you do to reduce your IHT bill?

  1. Use your annual allowance – there is an annual exemption, which allows individuals to give gifts totalling £3,000 a year, IHT free. Between two grandparents this could mean a significant amount of money over a long term period, and could allow grandparents to contribute to their grandchildren’s education, for example.
  2. Use your small gift allowance – you can make as many gifts as you want of up to £250 per recipient free from IHT.
  3. Make gifts from surplus income – you can make regular gifts out of your ‘surplus income’, free from IHT, provided you can prove the gift does not affect your standard of living.
  4. Many parents and grandparents will still want to help their children get on to the property ladder. Contributions to a deposit can be structured by way of outright gift or loan, or alternatively the property can be co-owned.
  5. As people live longer, children will often be grown up with families of their own before their own parents have died. ‘A deed of variation’ allows a grown-up beneficiary to keep the value of an inheritance out of their estate to avoid increasing their IHT exposure.
  6. Pensions can now be used as tax planning vehicles. If a pensioner dies over the age of 75 the pension can still pass to the beneficiaries free of IHT but may be subject to income tax.  Therefore rather than nominating the pension in favour of a surviving spouse who is a higher rate taxpayer the pensioner may decide to nominate it in favour of grandchildren with no or little other UK income.

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