What You Need to Know About Inheritance Tax
Posted on 5th October 2023 at 15:16
Inheritance tax (IHT) is a tax on the estate (the property, money and possessions) of someone who has died. It is charged on the total value of the estate, minus any debts and exemptions. The standard IHT rate is 40%, but there are some reduced rates and exemptions available.
Who has to pay IHT?
IHT is only payable if the value of the deceased’s estate is above the IHT threshold, currently £325,000. This nil rate band figure has been fixed until April 2028.
If the value of the estate is below the threshold, no IHT is payable. However, if the value of the estate is above the threshold, IHT will be payable on the part of the estate that is above the threshold.
What is included in the estate?
The estate includes everything that the deceased person owned at the time of their death, including:
• Property (both UK and overseas), & personal possessions
• Money (in bank accounts, savings accounts and investments)
• Life insurance policies
• Pensions - death benefit on most pensions is outside the IHT net ?
• Business assets
What is exempt from IHT?
There are a number of exemptions from IHT, including:
• Gifts to a spouse or civil partner
• Gifts to charities or community amateur sports clubs
• Gifts made more than seven years before death
• The value of any property left to children or grandchildren (including adopted, foster or stepchildren) up to a maximum of £500,000
How to reduce your IHT liability
There are a number of things that you can do to reduce your IHT liability, such as:
• Making gifts to your loved ones during your lifetime
• Putting assets into a trust
• Using life insurance to cover the cost of IHT
• Downsizing your home
What to do if you inherit an estate
If you inherit an estate, you will need to register the death with HM Revenue and Customs (HMRC) and complete an IHT return. If IHT is payable, you will need to pay it to HMRC before the estate can be distributed to the beneficiaries.
Here are some additional things to keep in mind about IHT in the UK:
•The residence nil rate band (RNRB): This is an additional tax-free allowance that is available to estates that include a property that was used as the deceased person's main home. The current RNRB is £175,000 and has been fixed at this level until April 2028.
• The tapered annual allowance (TAA): This is a reduced tax-free allowance that is available to estates that include a property that was not used as the deceased person's main home. The TAA is reduced by £1 for every £2 that the value of the estate exceeds £2 million.
• Gifts made in the seven years before death: Gifts made in the seven years before death are generally included in the estate for IHT purposes. However, there are some exceptions, such as gifts to a spouse or civil partner and gifts made out of regular income.
• IHT and trusts: Trusts can be used to reduce IHT liability, but they are complex and should be set up with the help of a qualified professional.
If you are concerned about IHT, it is important to seek professional advice to discuss your individual circumstances and how to reduce your IHT liability.
How to get help with IHT:
If you have any questions about IHT, you can get help from HMRC or a financial adviser. Advice2u can provide you with an initial consultation to discuss through your options.
Advice2u is a trading style of Coloma Wealth Management LLP, which is authorised & regulated by the Financial conduct Authority.
Tagged as: Help with inheritance tax, Inheritance tax
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