Thousands face ‘eye-watering' inheritance tax bills but there are legitimate ways to cut bill

The average bill could increase to £243,000 in the 2023/24 tax year, with more than 31,000 families having to hand over part of their inheritance to the taxman, Wealth Club calculations suggest.

The inheritance tax allowance has been frozen since 2009, which means growing numbers of families are being dragged into its orbit, however there are ways to mitigate big losses.

Nicholas Hyett, investment manager at Wealth Club said: “It may only be paid by a small minority of taxpayers, but for those picking up the death tax tab, the bills are eye-watering.

“And it’s not just the wealthiest families that are being dragged over the threshold for inheritance tax.

“Increasing house prices, coupled with threshold freezes, mean that more families are getting caught out by this most hated of taxes despite their quality of living remaining unchanged.

“In the last six months the government has faced increasing calls to abolish the tax altogether, or at least to introduce radical reforms. Evidence from countries such as Sweden and Australia suggests that reform could have positives aside from endearing politicians to voters.”

Abolishing inheritance tax has been linked with a decline in the number of businesses relocating overseas, and an increase in the number of wealthy individuals choosing to move to the country.

Hyett explained that in the meantime, the good news is that there are still “lots of legitimate ways for individuals in the UK to pass on money free of inheritance tax”.

Giving money away early

Gifts taken out of regular income, which are not deemed to affect the giver’s standard of living, are inheritance tax-free on day one – as are certain smaller gifts.

Timing is key as people can give unlimited amounts away but typically these take seven years to be completely inheritance tax-free.

Hyett said: “Of course, once you give away the money you’ve lost control. If you need it back for an emergency, that’s not an option.”

AIM Shares

If people buy shares listed on the Alternative Investment Market (AIM), they are free from inheritance tax once people have held them for two years.

If they invest successfully, the savings could be substantial, as any assets above the inheritance allowances are given with a 40 per cent tax bill.

However, the inheritance tax benefit is a reward for taking considerable risk by investing in small, often untested UK-listed companies.

Therefore, this approach is only right for experienced investors who understand the risks and can afford to lose money should it not work out.

Hyett continued: “Investing in companies that qualify for business relief are typically inheritance tax-free after two years.

“Investing in unquoted businesses can be risky, however, unlike giving the money away, you retain control.”

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Leaving money to charity

Leaving part of one’s estate to charity when they die can help to slash thousands of pounds off their bill.

If individuals leave 10 per cent or more of the value of their estate to charity, the rate at which they estate pays IHT drops from 40 per cent to 36 per cent, thanks to a rule introduced in 2012.

Ian Dyall of wealth manager Evelyn Partners said those who already have donations to charity written in their will should explore increasing the size of the gift, as doing so could save their family money.

He added: “Mathematically, if you are currently leaving over four percent of your net estate to charity, in many cases it makes sense to increase this to 10 per cent

“By doing this, the charity will obviously receive more money, but so will the beneficiaries of your estate, as the tax saving made due to the reduced inheritance tax rate is likely to be greater than the additional amount gifted to the charity.”