If you have plans to pass on money or assets after your death, your listed heirs could face a tax bills of up to 40% of the final estate. Your estate here is defined as your savings, property, and any other assets after any funeral expenses and debts have been taken away. Inheritance tax can be reduced or avoided in a number of different ways. Here we uncover what inheritance tax is and how it can also be avoided.
Inheritance tax rates and thresholds 2022-23
Everybody in the 2022-23 year of tax has a tax-free inheritance allowance of up to £325,000, otherwise known as the nil-rate band. This allowance has remained the same for at least a decade. The inheritance tax rate standard is typically 40% of anything encompassed within your estate that is over the threshold of £325,000.
For example, if you were to leave behind a personal estate worth at least £500,000, then your tax bill would come to £70,000. However, if you find yourself married or in a civil partnership, you might be able to leave more than that before paying your tax.
Do spouses have to pay inheritance tax?
Civil partners and married couples are allowed to pass assets and possessions to each other in tax-free forms in most cases. The partner that survives is allowed to use both of these tax-free allowances, provided that the first spouse to pass away did not use up their full allowance of inheritance tax by giving away a vast chunk of money within their will.
In the 2022-23 year, most couples who are married can pass on as much as £650,000, or £1m if the estate also includes the home, effectively doubling any amount that the surviving partner leaves behind tax-free.
Gifts and other methods to avoid inheritance tax
Some gifts can typically be tax-free, and this can include gifts between civil partners and spouses, or gifts to certain charities. Other gifts, however, are only potentially tax-free, depending on the date that they were sent. As long as a gift has been made more than 7 years before the death of an individual (not to a trust or business) you won’t have to pay any tax on it!
If you were to die within the 7 years, the tax that is payable on this gift might end up being reduced, depending on when exactly the gift itself was made. By putting your life insurance policy under a trust or including a deed of variation within your will are also methods to avoid paying inheritance tax.
Inheritance tax due on possessions or money passed on when you pass away is typically paid directly from your final estate. Your own estate is made up of absolutely everything that you own, minus any debts, such as those from your mortgage, and funeral expenses. Heirs must pay inheritance tax by the end of the six months after your death. An inheritance tax reference number is required from HMRC first, and this should be applied for at least 3 weeks before any payment is made. If the tax is due to be paid on certain gifts that you made during the last 7 years before you pass away, then the people who have received these gifts must also pay the tax in the majority of cases.
Makinson & Co. are your local accountant team situated in the Forest of Dean. We have over 40 years’ experience in all tax matters, and work with small to medium sized companies in and around Gloucestershire. If you would like to know more information about what we do and how we can help, take a look at our website www.makinsonandco.co.uk or give us a call on 01594 842188 – we’d be happy to help!