As Benjamin Franklin once said, "nothing is certain except death and taxes". And it turns around that even in death, we cannot escape taxes.
Inheritance tax is levied on the estate, namely the property, money, and possessions owned by an individual when they die. In the UK, IHT is currently charged at 40% on an individual's estate above £325,000, the "nil-rate band" threshold.
In this article, we will provide all the detail you need to understand inheritance tax and tips on reducing your IHT liability or the amount of your estate subject to this tax. This article provides an overview, but for detailed advice, please consult a professional who will be able to assist you further.
Our Inheritance Tax Calculator is on hand to help you determine what tax your estate may be subject to.
Inheritance Tax (IHT) is a tax on the estate of someone who has died, including all property, possessions and cash.
The UK's standard IHT rate is 40% and the tax-free threshold is currently £325,000. This means an estate is only subject to the 40% tax on its value above the £325,000 threshold (the "Nil Rate Band"). Estates valued below £325,000 are not subject to IHT.
If an estate is worth £1,000,000 and the tax-free threshold is at the standard £325,000, the IHT charged will be £270,000.
First, you must take the estate's value minus the threshold. In this case, it is £1,000,000 - £325,000.
This leaves £675,000 as the amount subject to IHT. This figure is then multiplied by 40% (the standard IHT rate).
This total tax paid in this example is, therefore, £270,000.
IHT can be complex, which is why it is always best to seek counsel from a professional. However, this article has noted some critical stipulations below.
To value your estate, you'll need to make a list of your assets and liabilities. The estate's value is the total value of assets minus the value of the liabilities.
Your assets are items of value that belong to you. These include:
Gifts, in the form of cash or other assets, made within seven years of your death are also considered when looking at your estate's total value. All gifts made to individuals more than seven years before your death are disregarded.
Conversely, liabilities are what you owe to others. These include:
Your estate will pay the inheritance tax, and the remaining money and assets are split between beneficiaries as decreed by your will. The executor of the will or administrator of the estate will usually organise the inheritance tax payment. It must be paid within six months of your death.
With intelligent estate planning, you can reduce the amount of inheritance tax and maximise the assets you leave to your beneficiaries.
Gifts given within seven years of your death will still count as your estate and be subject to inheritance tax. However, there is a yearly allowance of £3,000 that you can gift IHT-free. This is the total, not per person.
You can give up to £250 per person tax-free each year. You cannot combine this with the £3,000 gift allowance, so whoever receives some of the £3,000 cannot receive a further £250.
Money left to charity will not be taxed. Work out your charitable contributions wisely to avoid the £325,000 tax threshold.
Wedding gifts given shortly before or on the day of a wedding or civil partnership are tax-free. The couple's parents may give up to £5,000 tax-free, grandparents up to £2,500, and anyone else up to £1,000. If the wedding does not go ahead, then you cannot give this money tax-free.
When you put money or assets into a trust for your heirs, it is not counted as part of your estate and therefore is not subject to IHT. This money may be used to finance a house, education, or even provide an income. The beneficiary may be subject to income tax or capital gains tax but will avoid inheritance tax.
Because these assets are jointly shared through the nature of your relationship, they are not subject to inheritance tax. Take advantage of this exception and leave any remaining amount over the threshold to your partner.
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