Inheritance tax thresholds are set to be frozen yet again this year, dragging more of us into the IHT net after years of rising house prices and stock markets, said Laura Suter, head of personal finance at AJ Bell. “Someone in a relatively modest home could now easily hit the threshold from their property alone.”
Death duties are set to hit a record high of £7billion this year as a result, but families can fight back through carefully use of gifting.
Every year, you can give up to £3,000 away to whoever you like, with instant IHT exemption. If you didn’t use last year’s allowance, you can combine both allowances and pass on £6,000 in total. Couples could pass on £12,000 in total during the current tax year.
From April 6, they could gift another £6,000 combined.
You can also give up to £250 each year to any number of people, provided they haven’t benefited from the £3,000 exemption.
This is limited to one gift per recipient.
Everyone can also make IHT-free gifts when people they know marry. These are up to a maximum of £5,000 for a child, £2,500 for a grandchild and £1,000 for anyone else.
Suter said other gifts will be free of IHT if you live for another seven years after making them, known as potentially exempt transfers.
The IHT rate steadily reduces on a sliding scale if you survive more than three years after making the gift.
In a little-known rule, you can also make regular gifts from income with IHT exemption, provided you can demonstrate your own standard of living is not affected.
Another option is to give money to charity. If you leave at least 10 percent of your net estate to a good cause, you may cut the IHT rate on the reminder to 40 percent.
You do not save tax overall, but your money goes to your favourite good causes rather than HM Revenue & Customs.
Pensions currently escape IHT so retirees should use up other sources of income first, although there is a risk that pensions will soon incur death duties.
The capital gains tax (CGT) exemption will be slashed from £12,300 to just £6,000 in April, said Sarah Coles, senior personal finance analyst at Hargreaves Lansdown. “It will be halved to just £3,000 next year, so if you have made any capital gains consider taking them today.”
This is a blow as CGT is set to hit £15billion this year, which is double the total IHT tax take. Many call it the “forgotten tax”.
Cutting the CGT allowance will punish second homeowners and buy-to-let investors who sell up, Coles added. “Spouses should pool exemptions or move assets into the name of the lower taxpayer.”
In another tax cut, the dividend allowance for investments held outside of a tax-free Isa is halved from £2,000 to £1,000 from April 6, then to just £500 in 2024.
“Invest inside your £20,000 Isa allowance, where dividends can be taken free of tax. Don’t forget the £9,000 Junior Isa, which allows family and friends to save tax sufficiently for the under 18s,” Coles said.
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Income tax and National Insurance thresholds will be frozen in April rather than rising with inflation, with the personal allowance fixed at £12,570 until 2028, and the higher rate threshold at £50,270.
From April, the 45 percent additional tax band is cut from £150,000 to £125,140, hitting the better off.
The £100,000 level at which the personal allowance starts to be withdrawn is also frozen, dragging more higher earners into this pernicious tax trap.
Steven Cameron, pensions director at Aegon, said the tax freeze will increase tax bills for around 30million workers every year until 2028. “If you can afford it, increase your company or personal pension contributions, as they will attract tax relief at your marginal rate and reduce your exposure.”
Workplace “salary sacrifice” schemes for pensions, childcare vouchers, bike-to-work and technology schemes can also cut your income tax and NI bills.
The marriage allowance can save couples £252 if one partner earns less than the personal allowance and the other is a basic rate taxpayer. Claims can be backdated up to four years, giving a potential £1,242 total saving, she added.
Cohabitees don’t benefit.