With fears that UK’s mounting public debt will force politicians to cut inheritance tax limits, families are being urged to act quickly to reduce their potential inheritance tax bills.
Families are currently being hit with 40% inheritance tax (IHT) on any legacies they receive, although the first £325,000 is tax free. Plus gifts to a spouse or charity are also free of inheritance tax.
But with property prices booming in the 90s increasing numbers of families now have a home over the inheritance tax limit and are resentful of paying such a “death tax”.
As a result of this public mood, the inheritance tax threshold is high on the political agenda. In October 2007, the Conservatives pledged to raise the limit to £1 million, allowing a couple to bequest £2 million between them.
Reacting to the Tories’ proposal, Alastair Darling then announced in his 2007 Pre-Budget Report a change to the inheritance tax rules, letting the surviving spouse from a married couple use the tax-free allowance if their spouse had not used it.
This change immediately saved families of widows and widowers up to £130,000.
But this latest inheritance rule is costing the Chancellor dearly. In the tax year 2007-8 the Treasury received income of £3.8 billion from inheritance tax, but in the tax year 2009-10 this is forecast to be just £2.2 billion.
With public debt soaring, politicians are now feeling the pinch and Labour is already canvassing that the Conservatives’ proposal of increasing the inheritance tax limit to £1 million is unrealistic.
The Treasury has recently stated that this tax increase would cost around £5 billion over the next four years. But the Conservatives believe that other taxes can cover this cost.
With the increase in the inheritance tax limit becoming more and more difficult for politicians to deliver, accountants are advising their clients to take action now to lessen their inheritance tax liability, especially as every month can count when reducing a future tax bill.
For those families who haven’t done anything about inheritance tax, accountant Hugh Williams, and author of 101 Ways to Pay Less Tax, outlines the first few essential golden rules you should follow:
- Make a Will and revise it regularly. It’s particularly important to review your existing Wills following the 2007 Pre-Budget Report changes. Many couples previously ensured that they both used their full inheritance tax allowance by setting up will trusts on their death, but this is now unnecessary for tax purposes.
- List your assets and decide who you would like to leave them to.
- Calculate whether your estate will be hit by inheritance tax.
- If you have an inheritance tax problem, consult a specialist inheritance tax advisor on how to reduce the charge.
- Many gifts are exempt of tax, so make use of these exemptions.
- Married couples and civil registered partners should review how they own their own home for tax benefits.
- Loan trusts and discounted gift schemes are good ways of passing investments to your children.
Find out more with our Seven Steps to Saving Inheritance Tax.
Further information
Make your own Will today for only £9.99
Eight reasons why you should be making a will today
Find out if a DIY Will Kit right for you
Protect your family from heartache: why it's never too late to make a will
'Wills time-bomb' causing future heartache for families
Gifts exempt from Inheritance Tax
Life events: when you need to revise your will
Seven steps to saving inheritance tax