Inheritance Tax Receipts Hike To £2.9 Billion

What is an inheritance tax?

According to UK law, citizens pay an inheritance tax at a 40% rate on assets valued above a fixed threshold. Thus, currently, one in every 25 estates pays the tax. Moreover, due to inflation and years of rising house prices, an increasing number of estates are now exceeding the threshold.

Besides, the Wealth Club predicts that this tax year’s average payment can rise to just over £266,000. This represents a 23% increase from the average salary of £216,000 just two years earlier.

Reasons for inheritance tax rise

The Treasury raked in £2.9 billion from inheritance tax from April to August this year. This is £300 million higher than during the same three months a year earlier. Alex Davies, CEO, and Founder of Wealth Club believes rising home prices and years of fixed allowances are contributing to this. Additionally, the recent double-digit inflation has worsened the scenario.

The new prime minister promised to revise the laws governing inheritance taxes after her election. However, with so many more urgent concerns at hand, it’s difficult to believe IHT is at the top of the list of tasks for the Mini budget. However, the tax is a crucial source of revenue for the Treasury. So, the extra £300 million brought in over the last four months is undoubtedly essential.

Ways to lessen the burden of inheritance tax

The tax is a vital source of revenue for the government. However, there are a few reforms the government can take into account. It appears unlikely to completely abolish the tax. But, lowering the 40% rate or raising the threshold, which has been at £325,000 since 2010, would all be welcome adjustments.

Besides, the good news is that there are already a number of reasonable and legal ways to lessen the amount of inheritance tax your family needs to pay after your passing. Therefore, inheritance tax is sometimes referred to as a “voluntary tax” in certain areas. Here’s how to lighten up the tax burden from your shoulders:

Write a will

The initial action that you should take is to draft a will. Without it, your estate will be divided in accordance with pre-established guidelines. That means that the taxman may receive more money than is justifiable.

Use the gift allowance you have

You can give up to £3,000 tax-free each year. We define this as the yearly exemption. You can combine it and donate £6,000 if you didn’t use it the previous year. Moreover, you can also contribute up to £250 annually to as many people as you choose. However, you can give only one gift per recipient per year. Alternatively, you can give your child, your grandchild, or anyone else a wedding gift of up to £5,000, £2,500, or £1000.

Give larger gifts

IHT is free to pass along as much as you like. So, you won’t have to pay IHT as long as you live for at least seven years after dispersing money.

Donate to charity to leave a legacy

You can reduce the IHT rate on the remaining portion of your estate to 36% from 40% if you leave at least 10% of your net assets to a charity or a few other organizations.

Use the pension allowance you have

IHT usually exempts pensions. You can pass them on tax efficiently, and in some situations, tax-free. So, use your remaining pension allowance if you have any.

Create a trust

IHT planning has traditionally relied heavily on trusts. So, if you live for at least seven years after forming the trust, they can indicate that money does not belong in your estate. Moreover, if you’re thinking about doing this, you should get expert guidance. The associated taxes and legislation are complex, so you make your moves wisely.

Invest in businesses eligible for Business Property Relief (BPR)

You can receive full IHT relief if you own or invest in a business eligible for Business Property Relief. This includes most private businesses and some AIM-quoted businesses. However, you must continue to be a shareholder on your death for at least two years.

Buy an AIM IHT ISA

ISAs are tax-free while you’re alive. However, they may be subject to 40% IHT if you pass away before your spouse or if that happens later. Still, investing your ISA in specific AIM-listed companies that qualify for BPR is an increasingly popular strategy to get around this. In fact, if you continue to own the shares at the time of your death and hold them for at least two years, there may be no inheritance tax owed on their transfer.

Support smaller British businesses

A wide range of tax reliefs are available under the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). For example, SEIS offers loss relief if the investment is unsuccessful as well as up to 50% income tax and capital gains tax reliefs. However, investments made through EIS and SEIS are also eligible for BPR and may pass on free of IHT.

Put money into commercial forestry

For seasoned investors, this is a rarely used alternative. For years, organizations and pension funds have invested in forestry. A forestry portfolio owned by The Church Commissioners is worth £400 million. So, if held for at least two years and at the time of death, commercial forest investments should be exempt from IHT.

Additionally, you should gain from any cash generated from harvesting and selling the trees’ timber as well as from any increase in the value of the trees and the land they are on (this income can also be tax-free).

Spend it

Spending your money is one surefire way to keep it out of the hands of the taxman.