Inheritance tax: Five ways to pay less tax to HMRC in 2022 and save up to £250,000

Inheritance tax explained by Interactive Investor expert

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As many people get on top of their finances in January, people are being reminded that there are legal ways to reduce how much inheritance tax they need to pay to HMRC in 2022. Britons are throwing away millions of pounds every year in inheritance tax which could be avoided if they brush up on the rules.

That works out at a quarter of a million pounds each which could be legally avoided with the right advice.

Law firm Boodle Hatfield says that the most common example of Britons throwing away cash is parents gifting the family home to their children but continuing to live there.

This makes them so-called ‘Gifts with Reservation of Benefit’ – assets which have been gifted to another person but are still being used by the original owner.

These assets are considered by the taxman to remain part of the donor’s estate for Inheritance Tax (IHT) purposes.

As a consequence, those who have been gifted the assets could face a considerable tax bill.

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Five ways to legally avoid paying inheritance tax:

  • Give away £3,000 away each tax year inheritance tax-free. This allowance can be carried forward for one tax year.
  • Gifts to charities and political parties are tax-free when it comes to inheritance tax.
  • £250 per person can be gifted each tax year are excluded from inheritance tax and are not counted towards the £3,000 annual gift exemption.
  • Consider giving away money from income rather than assets if affordable.
  • Wedding gifts are tax-free up to a limit of £5,000 for a gift from a parent, £2,500 from a grandparent and £1,000 from anyone else.

Meanwhile, HMRC has updated its guidance to help people avoid paying too much inheritance tax.

Its online tool checker is available on the HMRC website for people to work out how much tax could be due.

However, the checker does not calculate the exact amount of IHT potentially owed.

Therefore it’s advisable to speak to an independent financial adviser for clarification.

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A rule change has also been announced which should make life easier for thousands of people.

Anyone who receives their inheritance on or after January 1, 2022 will no longer need to report the value of the estate they have inherited unless they are applying for a probate.

A probate is the legal right someone has to manage and control the assets of someone who has passed away.

However, if the estate owner died prior to or on December 31, 2021, the rule change will not be valid.

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