Households are losing money due to a “frozen” inheritance tax (IHT) allowance, experts have warned.
It is possible to give away a total of £3,000 worth of gifts each tax year without them being added to the value of an estate as part of the annual gifts exemption.
However, experts are highlighting how this exemption has been “frozen in time” for decades and has not risen with inflation.
This means that those attempting to avoid paying IHT by giving gifts may not be getting the full benefits of this exemption.
Households are being urged to watch out for 'frozen' inheritance tax threshold
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Quilter’s Head of Tax and Trusts Rachael Griffin said: “As well as tax affecting inherited wealth, there are also implications for gifts of money made during your lifetime. The law around gifting has been effectively ‘frozen in time.’
"The annual exemption currently allows you to give away £3,000 worth of gifts each tax year without them being added to the value of your estate even if you die within seven years of making them.
“But this was set in 1981 and hasn’t changed since. Had the allowance tracked inflation, it would be permissible to gift nearly £10,200 per tax year to the end of 2022 according to the Bank of England’s inflation calculator.”
IHT is levy on someone’s estate, including their property, money and assets, after they have passed away.
The rate of inheritance tax is 40 percent for any amounts above the £325,000 but people can avoid doing this by gifting.
It has been reported that the Government is exploring abolishing inheritance tax ahead of the next General Election in an attempt to gain more votes.
Analysis of recent HM Revenue and Customs (HMRC) figures has revealed that fewer than four per cent of estates paid inheritance tax between 2020 and 2021.
However, this figure is estimated to increase to more than seven per cent across the next decade.
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Rishi Sunak is considering scrapping inheritance tax if he wins the next electionPAAccording to Ms Griffin, changing the allowance threshold for gifting would offer much needed relief for those who at risk of paying IHT.
The tax expert added: "Given the allowance has been unchanged for more than 40 years and considering the economic backdrop it would be wise to change this and give a well needed carrot to a public who have suffered a lot of stick.
"Even if the various allowances are not uprated to help increase the amount of people making lifetime gifts, all the allowances could be amalgamated into one annual relief at a rate that better reflects current inflation."
