What is Inheritance Tax and how can I reduce it?

What is Inheritance Tax and how can I reduce it?

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Most of us will pay taxes for a large proportion of our lives and then still leave our loved ones with a tax bill to pay upon our death for Inheritance Tax…it doesn’t seem fair does it?

So what exactly is Inheritance Tax? When is it payable and is there anything that you can do to reduce your Inheritance Tax bill?

Let’s take a look…

Inheritance Tax only becomes payable on death and is calculated taking into consideration the value of everything that you own at the date of your death and including any gifts that you made within the seven years prior to your death. Any debts or liabilities that you have at the date of your death will be deducted from the value of your assets and this final balance is what is used to calculate whether any Inheritance Tax is payable.

If you are leaving your assets (property, money, personal possessions etc.) to your spouse or civil partner then this will be exempt from Inheritance Tax, as are any gifts made to Charities.

However, anything left to children or anyone else will be subject to Inheritance Tax where the value exceed the Inheritance Tax Threshold.

The Inheritance Tax Threshold is currently set at £325,000 per person and an additional £150,000 can be claimed if you are passing your residential property to a direct descendent (children / grandchildren), this is termed the Residential Nil Rate Band. The figure of £150,000 is set to rise to £175,000 in April of 2020 meaning that each person will have £500,000 before having to pay Inheritance Tax. This is also transferable between spouses and civil partners, meaning that if you pass everything to your spouse or civil partner upon your death then no Inheritance Tax will be payable and from 2020 (if both your death and your spouse/civil partner passes after April 2020) then your Estate can total £1million before any Inheritance Tax is payable.

If your estate is worth more than £2million then you lose the right to claim all of the Residential Nil Rate Band, thus for every £2 over the £2million valuation, you will lose £1 of the Residential Nil Rate Band.

Inheritance Tax is payable at 40% of anything above the Inheritance Tax Threshold (or Nil Rate Band).

If you are leaving 10% or more of your Estate to Charity (whether one or multiple Charities) then your rate of Inheritance Tax will be reduced to 36%.

Now, we mentioned above that any gifts made in the seven years prior to your death will be taken into account when calculating the value of your Estate. HOWEVER, if these gifts were made from surplus income then they do not need to be taken into account when calculating your Inheritance Tax liability. We all benefit from a £3,000 allowance each year which we are able to gift before Inheritance Tax become payable and so it may well be important to consider this when assessing the value of a deceased loved one’s Estate.

There may be other exemptions on gifts that you can benefit from such as gifts on marriage, you can find out more about this in our article – Inheritance Tax: What can be done to reduce your exposure? 

Another consideration that we would always advise looking at is putting your property into a Trust, meaning that upon their death the property passes to whoever they want it to (perhaps their children, grandchildren, nieces or nephews) but their spouse is entitled to benefit from the property and live there until their death or until they remarry (if this happens). This not only has the benefit of protecting the property for your intended beneficiary but also protects you and your spouse if the property is valued in relation to Care Fees as the share in Trust will not be taken into consideration.

As always, we would always recommend reviewing your Will regularly to ensure that it still does exactly what you want it to and that you have considered possible benefits and exemptions that you could benefit from.

Check out our article – Inheritance Tax: What can be done to reduce your exposure? For more information on reducing your Inheritance Tax liability.

If you would like to discuss your Inheritance Tax liability, or putting a Will in place, call us on 01727 865 121 or email us at info@TotalLegacyCare.co.uk for a free consultation

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Leah Waller

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