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Inheritance tax: Expert’s top tip for how savers could get ‘£18,000’ tax break


Some experts have warned that many could be hit with increased wealth tax bills as a result of Government policy as the UK economy recovers from the pandemic. In March’s Budget, Chancellor of the Exchequer, Rishi Sunak, froze the inheritance tax threshold at £325,000, a policy that will be in place until 2026. Families paid £5.4billion in inheritance tax in 2020-21, a rise of £190million on the previous year and close to the highest death tax haul ever recorded, official figures showed. While the Treasury continues to rake in more from inheritance tax and capital gains tax, experts have warned wealth levies could be hiked to strengthen public finance.

Richard Bull of Crowe, a tax firm, told the Telegraph last month: “More and more families will find themselves forced to pay inheritance tax in future as asset growth continues while tax allowances are largely frozen.”

However, experts gave savers tips on how to soften any wealth tax blow, including one tip that could lead to a tax break of £18,000.

One tip suggested by the experts is applying for enhanced protection from pension taxes.

Pension savings are exempt from inheritance tax, but beneficiaries of an estate can be hit with a 25 percent tax if they exceed the £1.07million pension lifetime allowance.

The lifetime allowance has also been frozen by Mr Sunak, meaning an increasing number of people will see their pots rise above the threshold in the coming years.

Andy Butcher of Raymond James suggests applying for “fixed protection” – this allows people who have been left worse off by the freezing of the threshold to claim their old allowance.

This could result in £18,000 of additional tax breaks, the Telegraph reported.

Mr Butcher added: “This may be useful in the event that an individual dies with a pension that has grown significantly over the past few years and they had unknowingly exceeded their available lifetime allowance.”

Another way the bill can be softened is through the use of a “deed of variation”, which can help savers by essentially allowing families to to rewrite the will of the deceased within two years of their death and redistribute their estate in a way that incurs less tax.

The legal document can also be used to cut future tax bills, as explained by Mr Butcher of Raymond James, an advisory firm.

He said: “If an individual dies and leaves their estate to their spouse, the surviving spouse’s estate will be assessed for inheritance tax on their subsequent death.

“Using a deed to divert part of the inheritance, say £325,000, into a trust will reduce the surviving spouse’s estate.”

READ MORE: Capital gains tax rate could be moved to 45 percent: ‘Possible!’

He added: “The spouse can also be a beneficiary of the trust. This enables them to borrow money from the trust if required rather than drawing capital or income.

“They could even pay interest to the trust, ultimately further reducing their estate and future tax. This also ensures that all future growth in the trust’s assets falls outside the ­taxable estate.”

Another potential route to reducing your bill is an application for inheritance tax refunds, which you could be eligible for if assets used in valuing your estate subsequently fall in value.

Gary Coogan of NFU Mutual said that this needs to be claimed proactively and that many people are unaware that they are eligible for a rebate.

He suggested those who think they could be accepted for a refund seek advice and “don’t miss out.”

Inheritance tax is one of the more divisive finance issues in the UK, as highlighted by recent debate over how to pay for the pandemic.

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Figures in the Labour Party, most notably Mayor of Greater Manchester Andy Burnham, have called for a hike on wealth taxes to pay for the pandemic instead of the National Insurance increase, which was announced earlier this month.

But Julian Jessop of the Institute of Economic Affairs told Express.co.uk that inheritance tax “makes no sense”.

He said: “I’m not a fan of inheritance tax because it isn’t obvious to me why someone should have to pay more tax because they have died.

“People should be free to build up assets and pay tax on the assets as they are going along, that’s fine. There might be a case for taxing the capital gains on your first home as well as your second home.

“The idea you should pay a tax bill because you have died, I don’t really see any justification for that.

“My personal view is that it should be abolished, I just don’t see what it is about dying that means you should pay tax. It doesn’t make an awful lot of sense to me.”

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