Latest government data shows that IHT receipts were £85 million higher in April compared to a year ago.
More families are getting caught by inheritance tax (IHT) as the latest government data shows IHT receipts were £85 million higher in April compared to a year ago. Tax expert Andy Wood from Tax Natives provides expert commentary on tax-efficient methods for passing wealth to your children.
Importance of Tax-Effective Wealth Transfer
Andy Wood, Tax NativesTax-efficient wealth transfer is crucial for those looking to provide financial assistance to their future generations while also minimising tax liabilities. With figures showing that over half of personal wealth belongs to over-65s, understanding tax-effective strategies is needed for efficient wealth distribution.
Recent data has revealed over 31,000 families are now required to pay part of their inheritance to taxes. As a result, by the end of the decade HMRC and the Treasury could see record IHT receipts potentially reaching £9.5 billion annually.
In April alone, IHT receipts increased by £85 million compared to the previous year, bringing the total to £700 million for the first month of the new tax year and marking a 7.2% rise in tax collection. As asset values continue to rise and the IHT threshold remains unchanged, more estates will be subjected to this tax. This makes tax planning strategies necessary to avoid getting caught in this tax trap.
Utilising Annual Gifting Allowances
Annual gifting allowances provide a valuable opportunity to transfer wealth without incurring inheritance tax. You can pass on assets tax-free using allowances such as the £3,000 annual exemption and £5,000 wedding gift allowance which is especially helpful for families facing financial challenges.
Potentially Exempt Transfers (PETs)
Potentially exempt transfers (PETs) offer a flexible option for larger gifts. The tax liability gradually reduces over time and becomes completely tax-free if the donor survives for seven years after the gift. Careful consideration of timing and proper planning is essential when making PETs to optimise tax efficiency and minimise potential tax burdens.
Gifts from Regular Income
Gifts from regular income present a valuable but underused opportunity for tax-efficient wealth transfer. With no limits on the amount that can be gifted, you can support your loved ones while reducing your taxable estate. However, there are some strict criteria to keep in mind if you want to stay compliant in the eyes of HMRC, such as demonstrating surplus income and ensuring there is clear evidence of an intention to make regular gifts out of the normal expenditure.
Record-Keeping and Documentation
Be sure to keep thorough records of your gifts to let HMRC know they are legitimate and tax compliant; this includes dates, recipients, amounts, and in-depth records of income and spending. While it may require some attention to detail, the tax savings make the effort worthwhile if you’re looking to maximise wealth transfer efficiency.
Significance of Knowledge and Planning
Understanding tax-effective wealth transfer strategies is important to keep and pass on your wealth efficiently. By staying informed about available allowances and planning, you can make the most of your financial legacy and provide meaningful support to loved ones while minimising tax burdens.
