Inheritance tax often ranks as one of the most contentious taxes in public opinion polls. Although it is thought of as only being a tax for the ‘wealthy’, house price increases are pushing more and more families above the thresholds.

The number of estates grappling with inheritance tax obligations has been on the rise in recent times, with a notable 17% surge to 27,000 in the 2020-21 period. Britons faced a record £5.76 billion inheritance tax bill during this timeframe. This upsurge can be attributed to heightened mortality rates during the pandemic and a prolonged freeze on the threshold triggering inheritance tax.

Remarkably, this threshold has remained stagnant at £325,000 since 2009 and is frozen until at least 2028 Inheritance tax is anticipated to generate nearly £10 billion annually by 2028-29!

One avenue to mitigate inheritance tax exposure is through lifetime gifting. Individuals can bestow gifts of any value without incurring inheritance tax, provided they survive for at least seven years thereafter. These are called 'potentially exempt transfers' (PETs).

However, a recent Freedom of Information (FOI) request to HM Revenue & Customs uncovered that in the 2020 – 2021 tax year, over 13,000 families encountered unexpected tax liabilities, reaching as high as £1.4 million on such lifetime gifts, due to the individual passing away within seven years of making the gift.

It's wise for individuals to begin estate and financial planning sooner rather than later to ensure the maximum inheritance is available for beneficiaries. Delaying this process heightens the risk of not surviving the full seven-year timeframe.

Inheritance tax is charged at a rate of 40% on the value of an individual's gift exceeding £325,000, if they pass away within three years.

Following this period, 'taper relief' kicks in. If the person making the gift were to pass away after three years, the inheritance tax rate decreases to 32% on the gift's value over the £325,000 threshold.

This rate further decreases to 24% for gifts made four to five years before death, 16% for gifts made five to six years before death, and finally settles at 8% for individuals who pass away within six to seven years of making the gift.

According to the FOI data, the average value of a failed gift stood at £156,000 after accounting for allowances and exemptions. This translates to a tax liability of £62,400 if the PET fails within the initial three years.

Although no one has a crystal ball, early planning could avoid these unexpected tax bills.

Call 0117 3636 or email office@haroldstephens.co.uk to organise a complimentary inheritance tax review.