What is Inheritance Tax (IHT) and do I have to pay it?

Makinson December 2020 blog - Inheritance tax

Inheritance tax is a tax on the estate of someone who has passed away. Their estate includes all property, possessions and money.

This can result in your loved ones paying hundreds of thousands in tax when you die. However, there are ways you can mitigate this if you plan correctly. How much is paid depends entirely on the value of your assets as well as other factors.

Assets include:

  • Cash in the bank
  • Investments
  • Property
  • Businesses
  • Vehicles
  • Life Insurance policies

A helpful guide on what Inheritance Tax is can be found below.

Who must pay Inheritance Tax?

There is usually no tax to pay if:

  • The total value of your estate is below the nil rate band of £325,000 or
  • You leave everything above this threshold to your spouse or civil partner or
  • You leave everything above this threshold to an exempt beneficiary e.g., a charity

 If none of the above applies, then your beneficiaries will be taxed at 40% on anything above £325,000. However, the threshold may be higher depending on individual circumstances – which we will explain more of below.

What if my spouse is deceased?

If you will not be passing your estate to your spouse because unfortunately, they have passed away, then you will have their NRB (nil rate band) allowanced added onto yours. This means you have a IHT free allowance of £650,000.

What if I own my home?

For homeowners there is another allowance called the residence nil rate band. This is commonly referred to as ‘main residence band’. To access this, you need to leave your main property to a direct descendant.

Who classes as a direct descendant:

  • Children and their spouses or civil partners
  • Grandchildren and their spouses or civil partners
  • Stepchildren
  • Adopted Children
  • Foster Children
  • Children who were under the guardianship of the people passing on their estate.

However, if your total estate is worth the £2 million, the additional allowance tapers off. Falling by £1 for each £2 above the threshold.

If you are married, you have double the residence nil rate band allowance. This means that from April of this year (2020) you can pass on as much as £500,000 tax-free, or £1m if you are married.

More information on properties and IHT can be found here.

Are there any exemptions from IHT?

Yes, if the person who dies in active service then they are exempt from inheritance tax. Included in this are:

  • Armed forces personnel
  • Police
  • Firefighters
  • Paramedics
  • Humanitarian Aid Workers

What other ways can I reduce my tax bill?

Here are some ways you can look to reduce your inheritance tax bill:

  • Regularly giving away up to £3,000 a year in gifts
  • Putting your assets into a trust for your heirs
  • Leaving a legacy to charity (gifting a tenth of your wealth to charity reduces your tax to 36%)
  • Leaving your estate to your spouse of civil partner
  • Paying into a pension instead of a savings account

NOTE: If you do not give away £3,000 in one year, you can pass this over for one tax year only.
Also, if you wish to gift more than £3,000, you can do this but you must survive 7 years past the date of the gift for it to be exempt from IHT.

Did you know?

Wedding gifts can be inheritance tax-free. A parent can gift £5,000, a grandparent £2,500 and £1,000 from anyone else.

How much inheritance tax will I pay?

Which have provided a calculator which you can use to find out.

For more information on IHT and other taxes your beneficiaries may be subject to when you die, give us a call today and we can help.

01594 842 188