The average UK house is only £50,000 short of the threshold, and the Office for National Statistics doesn’t see this trend reversing. It predicts that by 2026-27, inheritance tax will raise £7.6bn a year. So it’s a good time to revisit the ways to reduce the burden – and how to avoid the pitfalls. Inheritance tax on death is charged at 40% on anything over your tax-free allowance of £325,000 – and if you don’t entirely use that allowance, the remaining balance can be transferred to your surviving spouse or civil partner – potentially taking their allowance to £650,000. Your family home qualifies for a further discount if your total estate is under £2.35 million, when there’s up to an additional £175,000 tax-free when passing on your house to your children or later grandchildren. As before, any balance is also transferable to a surviving spouse if not used up on your death. But there are a few ways you can make sure to pass on as much as possible:

• The seven-year rule: You can make outright gifts of any value tax free, provided it’s at least seven years before your death. The rate starts to fall three years after the gift is made and drops gradually to zero over the following four.
• Normal expenditure out of income: If it is an option, you can make regular gifts out of your surplus income, tax-free. Regularity is important, but the amounts given do not have to be the same each year, and there is no limit on their value. But it’s worth noting that for the exemption to apply, gifts must not adversely affect your standard of living.
• The £3k-a-year rule: Each tax year, you can make one or more tax free gifts up to a limit of £3,000 in total. Any unused allowance may be carried into the next tax year.
• Give to charity: If you leave 10% or more of your estate to charity in your will, the IHT rate applied to the rest of your estate will be reduced from 40% to 36%. Alongside that, the value of the charitable gifts themselves will be deducted before IHT is charged.
• APR, BPR and woodlands relief: If you have agricultural property or woodlands, you may qualify for full or partial tax relief under APR (Agricultural Property Relief). Similarly, for those that own a share of a business or private trading company, whether AIM-listed or otherwise, BPR (Business Property Relief) may be available.
• Life Assurance: There are many reasons to take out life assurance, but one extra benefit is that it could help pay your IHT bill on your death. It doesn’t reduce your overall bill, but it can help your family fund the remainder.
• Smaller gifting allowances: There are other more modest exemptions available, such as one for small gifts made to any one person not exceeding £250 (provided they have not benefitted from the £3,000 annual allowance). Wedding gifts may also be made tax free. The limits are between £1,000 and £5,000 depending on your relationship to the recipient.

Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. The FCA does not regulate tax advice. This newsletter is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as of May 2022 and the contents of the Finance Bill. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.