Households left with ‘large and unexpected’ inheritance tax bill due to ‘complex rules’ | Personal Finance | Finance


Britons are warned inheritance tax is not just for the wealthy as everyday households are being burdened with the tax.

There are a range of exemptions available to help lessen the bill, however, these must be exercised with caution to avoid triggering other obligations, an expert explains.

A house bought in 2022 is three times more likely to result in families being hit by inheritance tax than in 2009 when the levy was first frozen at £325,000 – research by law firms Shakespeare Martineau and Mayo Wynne Baxter has revealed.

Analysis of the Land Registry’s price paid data shows that in 2009, 13 percent of all property purchases (83,266 out of 625,205) in England and Wales cost £325,000 or more. However, in 2022, this more than trebled to 40 percent (338,785 out of 843,730).

A recent survey by the firm found 80 percent of people saying they have not thought about making lifetime gifts to reduce their inheritance tax liabilities and more than one in five people saying they do not ever expect to consider estate planning.

With a lack of planning more families could find themselves being burdened by inheritance tax as the threshold continues to remain frozen until 2026.

Fiona Dodd, private client partner at Mayo Wynne Baxter explained rising house prices are swelling estate values and more properties are edging towards the £325,000 allowance – before possessions and money are even taken into account.

The standard inheritance tax rate is 40 percent, which can eat into what is left behind, leaving families facing “an unexpected and, potentially, large bill”.

Julia Rosenbloom, tax partner and chartered tax adviser at Shakespeare Martineau, said: “Many families that do not consider themselves to be wealthy could find themselves facing an unexpected tax bill because of the property they inherit.

“There are steps people can put in place to mitigate their inheritance tax liabilities and there are lots of options available to ensure as much wealth as possible passes to your beneficiaries rather than HMRC. Tax is such a complex area and the key to success is taking early specialist advice.”

Making a will

This is to ensure an estate is not shared according to pre-determined rules. Pensions can be a valuable tool when passing down wealth as the contents of a pension are not generally subject to inheritance tax.

Donations to charity

This is given as part of a will are also not subject to inheritance tax. Donating at least 10 perent of an estate triggers a discount on the rate paid too, reducing it to 36 percent.

Ms Rosenbloom continued: “There are other solutions that might be available to people depending on their circumstances.

Those wishing to make gifts while retaining control might consider using a trust or a family investment company, for example.

“Business owners may find that a substantial element of their wealth could be exempt from inheritance tax, but the reliefs are subject to very strict conditions, and it is easy to trip over those conditions and fall into unexpected tax liability.

“With a huge menu of options, anyone with a potential inheritance tax liability should take specialist tax and legal advice to ensure they are making the best of their situation.”

Andrew Wilkinson, head of inheritance disputes at Lime Solicitors said: “In order to avoid problems down the line and legal disputes, the most important thing is to work with a reputable specialist tax adviser who can help you find the best way forward.

“Benefit of families having open and honest discussions to avoid any confusion and financial misunderstanding when they eventually die. All too often the cases we deal with some from a lack of communication and a will containing a surprise that leaves people without money they were depending on.”


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