Inheritance tax (IHT) is a tax paid by a person who inherits the money or property of another person who has died. In the United Kingdom, Inheritance Tax is a “transfer tax” (i.e. a tax on the passing of title to property from one person to another) and it was introduced in 1986 to replace Capital Transfer Tax.
The current rule is that IHT is paid on anything valued above £325,000. How much your beneficiaries pay depends on the value of your estate, which is worked out based on your assets (cash in the bank, investments, property or business, vehicles, payouts from life insurance policies), minus any debts.
There is normally no IHT to pay if:
- The value of your estate (using the calculations above) is below £325,000 (called the “nil rate band”) OR
- You leave everything over £325,000 to your spouse, civil partner, a charity or a community amateur sports club
- If you give away your home to your children or grandchildren the threshold can increase to £500,000.
If none of the above applies, your estate will be taxed at 40% on anything above the £325,000 threshold, or 36% if you leave at least 10% of the value after any deductions to a charity in your will. If you leave everything to your other half the nil rate allowance for their estate doubles to £650,000 when they die.
Why do we have IHT?
IHT has always attracted controversy. The idea behind its introduction is that without it you perpetuate inherited wealth, so the children of the rich stay rich. IHT redistributes income so some of the money goes to the state to be distributed for the benefit of all. The argument against it is that when money’s earned, tax is paid at the time, so to pay tax on it again isn’t fair.
But whatever your views, IHT is a fact of life (or death) and with rocketing property values in recent years many people have been caught out by the inheritance tax threshold. So it makes sense to work out how it will affect you and your beneficiaries, and whether you can soften the blow. This is known as inheritance planning. Essentially, it helps you strategically manage your wealth to maximise the amount your beneficiaries gain.
Initially you should read up on all the rules and once you have a good idea of the value of your estate then you can start estate planning. The benefit of this is huge, especially since the government has frozen the inheritance tax rate for now. Efficient estate planning can help reduce the value of your estate, so that you have less tax to pay. In some cases, it could even bring you below the IHT-paying threshold. Then you won’t have to pay any tax.
Speak to an expert to see what your options might be.
You can find more information at www.gov.uk/inheritance-tax.
Disclaimer: This article is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. You should consult an Independent Financial Advisor for more information.
About the Author: Helen Say is a freelance copywriter and blogger www.cblservices.co.uk