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Is HMRC going to be the biggest beneficiary of your estate?

You can avoid HMRC being the biggest beneficiary of your estate by planning ahead and consulting an Inheritance Tax expert, advises Farida Isaji of Napthens

Inheritance tax receipts in the UK amounted to approximately £7 billion for the year ending March 2022, a record high. Inheritance tax – also known as the ‘death tax’ – is applied when someone dies. It is applied on the value of a deceased person’s estate worth more than the inheritance tax threshold. Any amount above the threshold is charged the standard Inheritance Tax rate at 40 per cent.

The inheritance tax allowance has been frozen at £325,000 since 2009 and under Rishi Sunak’s budget, will remain so for at least another four years. An additional allowance known as the residence nil rate band, gives a further allowance of £175,000 when a deceased person leaves their home to direct descendants eg children or grandchildren.

The effects of inflation and increasing house prices mean more families face paying inheritance tax. For some, the single biggest beneficiary will be HM Revenue & Customs (HMRC).

The earlier you make estate planning arrangements, the greater your chance of taking full advantage of tax mitigation opportunities, thereby maximising the amount that goes to your beneficiaries on your death.

Estate planning is likely to focus on passing assets down to future generations during an individual’s lifetime or placing assets into trust, so they do not form part of an individual’s estate on their death. However, we must be cautious when considering options. It is important to ensure assets are gifted effectively to remove them from an individual’s estate for inheritance tax purposes. In fact, gifting assets to family members or into a trust to mitigate inheritance tax can trigger other unexpected tax liabilities such as a capital gains tax, so it is important to take legal advice.

The effects of inheritance tax can be devastating, but there are steps you can take to mitigate inheritance tax including:
• Ensuring your Will is up to date and structured in a tax efficient way
• Making full use of exemptions such as the annual £3,000 allowance
• Making lifetime gifts of any value which will become exempt from inheritance tax if the individual survives for 7 years
• Making regular gifts out of any surplus income
• Optimising lifetime transfers between spouses
• Transferring agricultural or business interests to make use of any tax reliefs on such assets
• Transferring assets into trust to protect family wealth
• Arranging adequate life assurance to cover potential inheritance tax liabilities
• Considering the purchase of a specialised investment to reduce IHT
• Making gifts to charity of a certain amount in your Will to benefit from a reduced rate of inheritance tax of 36 per cent

As lawyers we can work collaboratively with your accountant and financial advisor to provide an effective, tailored approach to your estate planning needs, mitigating inheritance tax and preserving your assets for the future benefit of your family.

Farida Isaji is an Associate Solicitor with Napthens’ Wills & Estate Planning team

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