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Rising prices for property and other assets mean more middle income Britons are being hit by the tax when a loved one dies. There are several ways people can plan ahead to reduce the bill their loved one will face.
Daniel Harrison, chief executive of wealth management firm True Potential, said inheritance tax (IHT) is particularly disliked by the public.
He told Express.co.uk: “Inheritance tax reform is always a hot political issue. It’s a big revenue raiser for the Government but it’s also one of the most unpopular taxes with the public with many thinking it’s unfair.
“Being taxed on what you pass down to your loved ones, having already been taxed on income and wealth growth during your lifetime leaves a bad taste in many people’s mouths.”
He spoke about the ways people can reduce their IHT liability. He commented: “For now, you can do things like keeping savings in your pension, making an Expression of Wish to dictate who your wealth should go to, and contributing to charity, which can all help your loved ones inherit more of your hard earned wealth.”
Pensions are not considered part of a person’s will and are exempt from inheritance tax. They also have the benefit of avoiding income tax when a person invests money into the scheme.
Under the current personal allowance rules for pensions, a person can pay in up to £40,000 a year and avoid tax.
An Expression of Wish is a document that a person creates to tell their pension provider who they want to inherit the funds.
A person often arranges this in a 98 percent, one percent, one percent format, with a person’s spouse or partner inheriting 98 percent of the scheme while each of their children receive one percent each.
Once the person with the 98 percent dies, the two children then often receive 50 percent of the pot each.
Mr Harrison said: “The benefits of keeping an inherited pension alive as a beneficiary pension are clear.
“This is why we’ve been speaking with all of our clients to explain the importance of completing an Expression of Wish.
“We’ve also been encouraging them to speak with their beneficiaries to provide them with information to ensure they make the right decision.”
Another way for a person to reduce the inheritance tax liability on their assets is simply to reduce the size of their estate.
People can do this by giving away gifts. A person can give away up to £3,000 a year tax-free and can give any number of gifts up to £250, to different people.
There is also the option to give away money when a friend or loved one gets married, including up to £5,000 to a child, £2,500 to a grandchild or great grandchild, or £1,000 to any other person.
Those who want to give away a larger amount to an individual can do so but they have to survive seven years before the amount becomes exempt for inheritance tax.
Mr Harrison said there may be changes coming up for the Government’s IHT policy. He commented: “There have been discussions about changing the threshold at which inheritance tax is paid, or introducing a new tax on the transfer of wealth.”
Britons planning their pensions may also want to note the lifetime allowance, which is the total amount a person can save in their private pensions and avoid tax. This is currently £1,073,100.
A person should contact their pension provider if they want to find out how much of their lifetime allowance they have used.
Those who have more than one pension scheme will need to add up all the funds they have invested across the different schemes.
Lee Clark, financial planner at wealth manager RBC Brewin Dolphin, has called for the two allowances to rise in line with inflation, like the triple lock on the state pension.
He said: “This would ensure a consistent inflation-linked approach to pensions.
“The LTA has halved in real terms since 2012. And it’s been frozen for five years until 2025/2026 meaning it’s reducing in real terms by the current inflation rate of around 10 percent, per year.”
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