Inheritance Tax is the tax on an estate of a person who has died. The estate includes everything the person owns (property, money & assets) and any property or money they had given as a gift in the seven years prior to death.
If the estate’s value is £325,000 or below, no inheritance tax has to be paid. If its value exceeds £325,000, 40% of everything above the £325,000 threshold has to be paid as inheritance tax.
For example, if the value of your estate is £400,000, the first £325,000 is exempted from inheritance tax. 40% of the remaining £75,000, which is £30,000, has to be paid as inheritance tax.
Allowances on Inheritance Tax
Leaving to your partner and children
- If you leave your entire estate to your husband, wife, or civil partner, you do not have to pay anything as inheritance tax even if the value of your estate is over £325,000.
- Married couples and civil partners share their thresholds on inheritance tax. What does that mean?
If you pass your estate to your spouse or civil partner without crossing the £325,000 threshold, the threshold gets passed on to the surviving partner. It means that your partner will now have a double allowance on inheritance tax i.e., £650,000.
- Since April 2017, an extra allowance has been made for inheritance tax. If you leave your home to your children (including adopted children and step-children) or grandchildren and its value is £175,000 or below, it will be exempted from inheritance tax.
So, if your estate includes your home and you are leaving the home to your descendants, your threshold will be £500,000. And since married couples and civil partners share their thresholds, the surviving partner’s allowance can now be up to £1M.
Leaving to charity
- If you are leaving your entire estate to a charity, the estate will be completely exempted from inheritance tax.
- If you leave 10% of your estate to a charity, the inheritance tax is reduced from 40% to 36%.
Gifts given prior to death
- Every year, gifts up to £3000 are exempted from inheritance tax. If you haven’t used the yearly allowance of gifts, it gets carried forward to the next year. It means that in the next year, you can give gifts up to £6000.
- Any wedding or civil ceremony gifts are also exempted from inheritance tax. However, gifts cannot be more than £1000 per person. If it’s for a grandchild, the gift can be up to £2500 and if it’s for your own child, it can be up to £5000.
- You can also give unlimited gifts, each worth up to £250. However, you cannot give these gifts to someone who you’ve already given a gift under the previously mentioned exemptions.
To avoid or reduce inheritance tax, you can also put your assets in a trust for your heirs, use a life insurance policy or pay into a pension. All such investments will go directly to the beneficiaries and will not be included in the value of your estate. Since it is not considered a part of your estate, no inheritance tax will be taken for it.
If you need any advice to assist you with estate planning and with regards to calculate the taxes involved, please feel free to reach out to us for a free initial consultation. Contact us today.