People trying to avoid tax could end up paying 40% levy | Personal Finance | Finance

People trying to plan their affairs to avoid a hefty HMRC bill could still end up with a 40 per cent tax to pay.

More and more families are being dragged into being liable for inheritance tax, as house prices and other assets rise in value. The 40 per cent tax applies to any inherited assets above certain thresholds.

While there are some things you can to reduce your liability, you may want to think through how you do this or your family could end up paying more than you expect. Experts at wealth firm Spencer West said they are seeing a rise in people taking action to try and bring down their bill, yet they could still have an amount to pay.

Private wealth partner at the firm Hudda Morgan warned: “Without careful planning, this could potentially mean people unknowingly becoming liable for inheritance tax.” She pointed to several groups who could unexpectedly end up with a bill while thinking they are exempt or despite their efforts to minimise their bill.

One such 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”. There are yearly allowances for how much you can give away with no tax to pay on the amount – but any gifts above these limits will be subject to the 40 per cent levy.

You can give a total of £3,000 worth of gifts split between different people, 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. You can also gift an amount above these limits but you need to survive for another seven years for the amount to be exempt from inheritance tax.

Ms Morgan said another group who could end up paying a lot more than they expect is “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 pass on 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 read up on the rules are those with an estate valued at more than £2 million, as after this point you start to lose the £175,000 residential allowance.

However, given the nil rate allowances, the vast majority of inherited estates are still not liable for inheritance tax. Ms Morgan 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.”