HMRC twist as full list of people facing massive inheritance tax bill released

A financial expert has identified certain groups who could be stung with a 40 per cent bill despite their efforts to bypass inheritance tax

Certain groups of people attempting to organise their finances to avoid a massive HM Revenue & Customs (HMRC) bill could still be hit with a 40 per cent tax bill. Families are increasingly being drawn into the inheritance tax net as property prices and other assets appreciate.

The 40 per cent tax is applicable to any inherited assets above certain thresholds. While there are measures you can take to lessen your liability, careful consideration is needed to prevent your family from paying more than anticipated.

Experts at wealth firm Spencer West have noted an increase in people taking steps to reduce their bill, yet they may still owe a sum. Hudda Morgan, a private wealth partner at the firm, cautioned: “Without careful planning, this could potentially mean people unknowingly becoming liable for inheritance tax.”

She highlighted several groups who might unexpectedly receive a bill, believing they are exempt or despite their attempts to lower it, reports the Express. One group she mentioned was “recipients of lifetime gifts over the donor’s inheritance tax allowances, where the donor dies within the first seven years of making the gift”.

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There are annual allowances for how much you can give away without incurring tax on the amount. However, any gifts exceeding these limits will be subject to the 40 per cent charge.

You can distribute a total of £3,000 worth of gifts among different individuals, and you can separately give any number of gifts up to the value of £250 to different people, as long as you haven’t used any part of your other allowances on the same people. Furthermore, gifting an amount above these limits is permitted but you need to survive for another seven years for the amount to be exempt from inheritance tax.

Hudda also warned that trouble could be in store for those cohabiting. She said: “unmarried couples thinking because they have been together for a long time they will be treated as spouses and eligible for inheritance tax relief – they will not.”

Each person has an individual inheritance tax of £325,000 which you can pass on tax-free, as well as an extra £175,000 if passing on your main residence to a direct descendant. You can transfer any unused allowances to your partner, but you will need to be married to them or in a civil partnership for this to apply.

Another group who should familiarise themselves with the rules are those with an estate valued at more than £2m, as after this point you start to lose the £175,000 residential allowance. However, considering the nil rate allowances, the vast majority of inherited estates are still not liable for inheritance tax.

Huda said: “I see families coming to me in a panic, wanting to transfer assets out of their name to reduce an inheritance tax liability that doesn’t exist because they are within their allowances, and/or which might leave them without sufficient assets/financial security.

“The tax tail should never wag the dog, especially as recent figures show only six per cent of estates are liable to pay inheritance tax.”