Andy Burnham wants to slap 10% on inheritance tax – fight back now | Personal Finance | Finance

Inheritance tax was originally designed to hit the rich but these days it’s the middle classes who bear most of the burden. While the truly wealthy employ financial planners to protect themselves, ordinary people often fail to act until too late. Planning ahead is more important than ever, thanks to former chancellor Rachel Reeves. She slapped inheritance tax on unused direct contribution pension plots and death benefits from next April. She also froze the nil-rate IHT band at £325,000 all the way to April 2031. By then, it will have been frozen for more than 20 years, dragging more families into the net every year.

The Office for Budget Responsibility forecasts that total IHT receipts will rise by 67% over the next five years, from £9.1billion this year to £14.5billion. And things could get worse under new PM Andy Burnham. He’s previously floated plans to fund social care costs by slapping an extra 10% tax. It’s time to fight back. Now.

Making gifts is one of the most obvious ways to reduce a potential IHT bill, said Ian Dyall, head of estate planning at wealth manager Evelyn Partners. “But it’s also one of the most fraught. Many fear they’ll regret their generosity, either because they end up running out of money themselves, or because the gifted wealth gets spent or shared in a way they strongly disagree with.” Dyall lists seven golden rules to help families avoid rifts and IHT blunders.

Start planning early. Too many leave it too late and regret it later. “Gifts made earlier in life have a higher chance of meeting the seven-year rule for ‘potentially exempt transfers’. Even annual gifting allowances could make a dent in an estate if used carefully over two or three decades. The underused ‘gifts from surplus income’ tactic also usually works best deployed over time.”

Check you can afford gifts. Building wealth makes us feel secure. “Turning a lifetime of saving on its head and spending or gifting down wealth can feel uncomfortable and needs to be approached carefully,” Dyall said. Trusts may allow you to start the clock ticking on the seven-year exemption rule while retaining some access or control, but require careful planning.

Know the rules. If you give assets away, you cannot continue to benefit from them. “You can’t give your house to your children but continue to live in it rent free, or even at a beneficial rent. It will be treated as a ‘reservation of benefit’ and remain liable for IHT.” Similarly, children may also have to pay income tax on rental income they receive. Reservation of benefit rules are complex, so understand all the angles.

Pass on an inheritance. If you inherit money from a parent or relative, you could pass it on tax-efficiently using a “deed of variation”. This allows the gift to be treated as though it was made by the person who died rather than you, so it doesn’t become part of your estate for IHT. Dyall said: “This can be done up to two years after the person’s death, but once you miss that deadline the very valuable opportunity is gone.”

Put your faith in trusts. Trusts allow you to make a gift today while retaining control, but lifetime transfers into a trust may trigger an immediate 20% IHT charge on sums above the available £325,000 nil-rate band. However, a married couple could still gift £650,000 free of IHT every seven years. Another reason why starting early is important.

Beware this cliff edge. If larger estates top £2million they start to lose the £175,000 residence nil-rate band, which applies when qualifying family homes are passed to direct descendants. It’s then reduced at a rate of £1 for every £2, Dyall said. “If the estate can be kept below £2million by gifting that will be especially beneficial.”

Time gifts carefully. When making sizeable gifts to multiple children which in total exceed the nil-rate band, ensure they receive them on the same day. “Gifts use exemptions and allowances in the order they are made. So if made on different days to different children, the earlier gifts benefit from all the allowances and the later gifts suffer the tax.”