What is Inheritance Tax?
Posted 15th November 2018
Inheritance tax is a tax applied upon death to estates worth in excess of the nil rate
band (NRB) of £325,000. The part of your estate above this threshold is taxed.
E.g. John dies and his estate is valued at £400,000. His NRB is £325,000 meaning tax will be charged on £75,000 (£400,000-£325,000). The tax payable would be £30,000 (40% of £75,000).
*above example not taking into account any Residence nil rate Band (RNRB).
It is also important to take into account the Residence nil rate band (RNRB) when valuing assets. This is also known as the home allowance. This allowance is in addition to the NRB provided that certain criteria are met. See Residence Nil Rate Band (RNRB) - at a glance.
How do I value my estate?
When valuing your estate it is important to take into account the following:
- Property- Your main residence any other properties or part of a property which you may own.
- Possessions- such as cars, jewellery, ornaments, equipment.
- Savings and Investments- such as ISA’s, Bonds, Stocks and Shares.
- Any gifts given in the last 7 years (above the exempted gifts allowance).
How can I reduce my Inheritance Tax liability?
Inheritance tax can be very costly and can reduce the amount of inheritance you manage to leave to your family significantly. IHT planning is very important.
Below are some basic ways to help with this.
- Gifts left outright to a husband, wife or civil partner are not subject to IHT.
- As a rule of thumb any gifts left to a registered charity are not subject to IHT. Furthermore, it is possible by leaving in excess of 10% of your estate to charity to reduce IHT payable from 40% to 36% although these gifts need to be given outright e.g not in trust for the charity.
- Gifts made to other organisations such as the National Trust and political parties will not be subject to IHT.
- Ensure where possible that we place insurance policies within Trust
- Make good use of the exempted gifts allowance of £3,000 per year. On top of this we are also able to gift other amounts e.g. for weddings of up to £5,000 for a child, £2,500 for a grandchild, £1,000 for other people.*
*It is also possible to gift more than stated above but it is important to remember that any such gifts will be subject to the 7-year rule and subject to taper relief. (40% tax if person dies in 1-3 years of making gift reducing at 8% per year until after 7 years no tax will be due).
Contact us for expert advice on all aspects of Inheritance Tax and Inheritance Tax planning.
Although everybody has heard of Inheritance Tax, we still often get asked the question what is Inheritance Tax and will I need to pay Inheritance Tax?
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