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Warning: the state is after your inheritance

Warning: the state is after your inheritance

If you thought only the rich paid inheritance tax, think again, says money expert Harvey Jones.

More and more ordinary people will end up paying death duties, and could lose tens of thousands of pounds as a result. When you die, inheritance tax is charged at 40% on all of your assets above £325,000, including your family home. Rising house prices are pushing more households over that threshold, especially in London and the South East. They now pay half of the annual £3.1 billion worth of inheritance tax collected by HM Revenue & Customs.

The average bill is a whopping £166,000.

Worse, the inheritance tax threshold is set to be frozen at £325,000 until 2019, while house prices may keep on rising.

How to reduce your bill

The good news is that there is plenty you can do to reduce your bill. The earlier you start, the better.

First, married couples and registered civil partners can pass on their £325,000 inheritance tax allowance to their partner when they die. This effectively doubles their tax-free allowance, which means that when the second partner dies, the first £650,000 of their estate is free of inheritance tax. The rule doesn't apply to cohabiting couples. You can also cut your tax liability, and make a lot of people happy at the same time, through careful use of gifts.

You can't escape inheritance by simply giving away your property and other assets shortly before you die. You have to survive at least seven years for the gift to be completely exempt. In any case, most people wouldn't want to give their home away, even to their children. If your kids subsequently get divorced, your home could form part of any settlement, and you could lose it. An easier option could be to whittle away at your family's inheritance tax liability by making gifts to your loved ones.

You can make gifts of up to £3,000 a year to whoever you like, and the money will be exempt from inheritance tax when you die. Married couples can gift £6,000. If a couple each gifts £3,000 for 10 years, they will reduce the size of their estate by £60,000. Assuming that was all liable for inheritance tax, their beneficiaries will have saved £24,000. You can also give wedding gifts free of inheritance tax. Parents of the couple can each give cash gifts worth up to £5,000, while grandparents can each gift up to £2,500. Anyone else can give up to £1,000.

You can make small gifts up to the value of £250 to as many individuals as you like, unless you have already handed them any other gifts. There are more complicated ways of reducing your inheritance tax bill, but for that you need specialist advice. Don't try anything too tricky. You don't want to end up like Gary Barlow.