HMRC issued requests for £326million in payment shortages in 2021/2022, an increase of more than a quarter compared to the previous year. Heather Pollard, head of underwriting at Tower Street Finance, spoke about why people could be underpaying on their IHT bill and how to avoid this.
She offered five key considerations people should think about to make sure they pay the correct IHT amount, and how to reduce one’s tax bill.
It’s important for people to understand what counts as constituting a person’s ‘estate’, which will be subject to the tax.
A person’s estate includes their property and valuables, including bank accounts, vehicles and shares.
Debts such as mortgages, funeral expenses and other taxes are deducted from the estate before IHT is applied to the total remaining assets.
An additional residence nil-rate band may also apply if a property is being passed on to a direct descendant.
A person can find out how much of the residence nil-rate band would apply to their estate using a calculator tool on the Government website.
The 40 percent only applies to amounts above the IHT threshold. For example, if a person inherited an estate worth £326,000 from an individual, they would pay 40 percent of the £1,000 above the threshold.
This means they would have to pay £400 in inheritance tax. The money has to be paid to HMRC within six months of the person’s death.
READ MORE: Inheritance tax warning as ‘risk’ Jeremy Hunt may target IHT in Budget – what you can do
The rules differ for married or civil partners
Married couples of civil partners do not pay inheritance tax on any assets left to their partner.
When the second partner dies, the estate gets ‘transferable allowance’ meaning the estate gets twice the £325,000 allowance, with a £650,000 threshold, as long as this has not been previously used.
The extra transferable element is also known as the transferable nil rate band.
Other good practices to avoid IHT bills
People should keep track of the gifts they have received and who they were from. If HMRC queries a gift, the person who received it is responsible to provide the details so they can be taxed correctly.
Another good thing to look at is trusts, as these provide more control over what happens to a person’s assets when they die.
Trusts are complicated to set up and are subject to different tax rules. Families are advised to seek financial advice before creating one.