Inheritance tax explained

What is Inheritance Tax (IHT)?

The amount of tax owed on a person’s estate once they have become deceased.

How is it calculated?

The government assesses what a person’s estate is worth once they die, which includes any assets including property minus any debts. If the amount the estate is worth exceeds the Inheritance Tax threshold, which currently stands at £325,000, you will have to pay tax at 40% on all assets over that figure, though this is reduced to 36% if at least 10% is left to charity.

The nil-band threshold

This is the amount that people are allowed to leave without their survivors having to pay tax on. It is so-called because it is the amount that people pay no rate of inheritance tax. The current threshold is £325,000 which is frozen until 2018. So, if somebody is left £1m, the first £325,000 is tax free but they will have to pay 40% tax on the remaining £675,000 (or 36% if at least 10% of assets go towards a charity).

Do things change if I am married?

This does change things, because the law states that any assets left to a spouse or civil partner are exempt from inheritance tax. In addition, any amount not left to others means that the surviving spouse’s tax allowance is increased. Therefore, when the surviving spouse dies, they might have a full allowance of £650,000 (£325,000 x 2) before the tax at 40% is due. 

Can the bill be reduced in any other way?

Any money given away before you die is regarded as being part of your estate and therefore may be liable for inheritance tax if you die within seven years of having made the gift. So, as life expectancy is not an exact science, giving gifts sooner is recommended. If a person makes large lifetime gifts, the beneficiaries could take out life insurance against the potential inheritance tax bill. Most gifts in trust are now subject to inheritance tax even if made during your lifetime, but this is an area where you would need specialist advice.

However, even if you do die within seven years of making a gift, there are a range of other exemptions worth taking into account to help lessen the tax bill:

  • Annual inheritance tax gift exemption: the first £3,000 given away every year is not subject to inheritance tax - it can be carried forward to the following year if not all used in one go.
  • Gifts to charities and political parties are inheritance tax free.
  • Also free of inheritance tax are gifts of no more than £250 to any one recipient per tax year.
  • Gifts from income: if you have income and you give money regularly from that, leaving you enough not to impact on your lifestyle, then it is also exempt from IHT.
  • Gifts on consideration of marriage: gifts are also exempt from IHT if they are conditional on an agreement of marriage or civil partnership, though the maximum that can be spent this way is £5,000 from a parent and less from others, however it must be conditional for it to be free of IHT.
  • Woodland, heritage, farm and business: if you own an agricultural property that is part of a working farm, a percentage may be exempt from tax. Similarly if you own woodland, those who receive it in your Will can apply for the timber on it, but not the land itself, to be deemed exempt. Do check what happens when the timber is sold though as inheritance tax may apply at that time.

For further support and advice contact our Winston Accountants team on info@winstonaccountants.co.uk or call us on 0113 218 5450.

 

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