Whether your estate is large or small, understanding inheritance tax is extremely important. This Tax (IHT) affects how much of your estate is taxable after you have passed away, which is why many people plan ahead in order to reduce the amount their family and loved ones could have to pay. In this guide, you will find information on the inheritance tax threshold, when you must pay inheritance tax, and tips on how to plan for it.
By researching and understanding the different aspects of inheritance tax, you will be able to cut down on how much goes to the government and ensure that as much of your estate as possible stays with your family.
Inheritance Tax is paid out of the assets and property owned by the person who has passed away. IHT is a complex topic, and it is all too easy to pay more than you need to if no plans have been put in place to reduce its impact on an estate.
People often fall into the trap of thinking only the wealthy are liable, but with house prices as they are now, it is all too easy to slip above the inheritance tax threshold. More on this later. Remember that if the only asset is a property, often the family home, above the threshold, there will still be an inheritance tax bill to pay. This pay mean that the family home has to be sold to settle the bill.
In the UK, 40% of all estates are liable for IHT. It is important to be aware of your Inheritance Tax obligations to ensure that you are not overpaying or leaving your beneficiaries with a larger tax bill than necessary.
What is the "Threshold"?
When someone inherits money or property, their inheritance may be taxed. In the United Kingdom, this is Inheritance Tax (IHT). There is a threshold above which inheritance Tax must be paid. Currently, this threshold is £325,000. Anything over this figure will be taxed at 40%. Understanding the IHT threshold can help you plan your will and make sure that your loved ones receive the most from your estate.
How is the Tax Threshold Calculated?
In the UK the calculations for the inheritance tax threshold can become quite complex. The tax threshold is set at £325,000. When determining how much inheritance tax is due this threshold will be used along with the assessment of the total assets in the estate. There are a number of exemptions to reduce the amount of inheritance tax due, including gifts and the transfer of the threshold to a surviving spouse. It is advisable to seek professional advice if you are not sure of the figures.
When do You Pay Inheritance Tax?
How much inheritance tax you pay will depend on the value of your estate. Essentially, anything above the threshold (currently £325,000) will be subject to inheritance tax, with the tax rate calculated at 40%.
It is important to understand the calculations, as well as the allowance for assets and gifts, transferring the threshold to a surviving spouse, which increases the threshold, or leaving your home to children or grandchildren. These calculations and allowances are complex, so you should seek professional advice to avoid errors and over or underpayment of IHT.
Tax Planning & Professional Advisers
Using a professional adviser for your estate planning can make the difference between putting the right structures in place to mitigate the risk of paying too much IHT, or not.
Inheritance tax is a complex area of tax law, and with specialist experience and knowledge, a professional adviser can ensure that any estate planning is completed accurately, and ensure that wills are drafted properly.
Professional advisers (such as us!), can provide accurate advice and ensure that your estate plan is designed to fulfil your wishes after death while avoiding additional taxes.
A consultation with a professional adviser therefore can give you peace of mind for the futurIHT
Estate Planning Documents
Having a well-drafted will is the foundation of any estate plan and the starting point for any individual looking to ensure that their assets are distributed in line with their wishes and legal obligations.
In addition to wills, there are a number of other documents that are essential for full estate planning. These include Lasting Powers of Attorney and Trusts. These are complex documents that require professional expertise to create and will come at a cost. You need to assess what your estate planning, done correctly, will cost, compared with what your estate will have to pay in inheritance tax, if your documentation does not fully consider your estate, assets and your inheritance tax liability.
Inheritance Tax Exemption on Gifts
Gifts can be an effective way of reducing the size of your estate for Tax purposes, and there are various exemption categories you can explore. For example, you can exempt gifts to qualifying charities from Inheritance Tax, or up to £3,000 worth of gifts each tax year.
These gifts could be amongst others such as money, or other assets. When writing a Will it is important to be aware of these exemptions and plan accordingly, so please talk to one of our professional team for more information on how you could take advantage of them
Spousal Exemption
One of the major benefits of being married or in a civil partnership is that your spouse or civil partner can receive an inheritance tax exemption should you pass away. In the UK, your estate is subject to inheritance tax if it’s worth more than £325,000, or if you’ve made certain gifts within seven years of your death.
Your spouse is usually entitled to the spouse exemption, meaning that their inheritance from you is free from inheritance tax liability, no matter how much your estate is worth. However, it’s important to be aware that any gifts that you make to your spouse within seven years of your death will be combined with your estate and taken into account when assessing your overall inheritance tax liability.
When the surviving spouse dies, the inheritance tax thresholds are increased to consider the allowance passed on at the death of the first spouse.
Charitable Donations
When an estate is valued at over the inheritance tax threshold, a liability is placed on the amount of inheritance tax due. The money owed must be paid before the estate can be distributed. This tax is charged at 40% on all amounts exceeding the threshold and any individual receiving a taxable sum of money has to pay the tax.
To reduce the amount of inheritance tax due, individuals can make charitable donations. Donations are deducted from the taxable amount of the estate, enabling those who exceed the threshold to reduce their liability. It’s a good idea to consult with an adviser to ensure you understand the inheritance tax process and receive the appropriate advice.
Is IHT Avoidable?
No one wants to pay more tax than necessary, and inheritance tax is no different. Taking the right steps when planning ahead can help you to avoid inheritance tax liability and can make all the difference. For starters, it’s useful to be aware of the tax free threshold, which is generally the value of any estate that is below £325,000.
Additionally, if the amount being passed on is between a spouse, then there is an unlimited ‘spouse exemption’, meaning no tax is payable. It’s always worth remembering the bigger picture too. Seeking professional financial advice can ensure you have the best possible plan in place to avoid a large inheritance tax bill. Planning your estate carefully in advance can be the most effective way to reduce your inheritance tax liability.
Keeping Money in Financial Instruments
There are legal instruments that can be deployed to reduce or even avoid inheritance tax. Trusts can help to reduce the amount of inheritance tax due. They are a legal agreement between a person and the trusts, which are managed by trustees. The assets are distributed in accordance with the trust’s terms.
This can mean that the assets and funds held in the trust are not subject to inheritance tax. Similarly, investments can be made through life assurance policies and other legal instruments, which can help reduce the amount of tax due upon death. Although it can be a complex process, properly preparing for your death through these legal measures can save valuable funds for your designated beneficiaries.
Next Steps
Considering the next steps can be difficult. Contemplating one’s own death can be emotional, but the reality is that if your estate planning is not carried out with your final wishes and measures to protect your estate for your beneficiaries, including any inheritance tax liability, fully considered, you may create unintended consequences, including a large IHT bill, other liabilities, or uncertainty amongst your family of what your final wishes are.
Our team is here to help you. We understand the emotional journey that you may go through during the estate planning process, and the complexities of the liabilities of creating an estate plan that is tailored to your final wishes, personal and financial circumstances, and that is fit for purpose.
