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Inheritance Tax

Inheritance Tax Advisers in London

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    What Is Inheritance Tax?

    Inheritance Tax (IHT) is a tax imposed on those who receive assets from the estate of someone who has passed away.

    IHT is levied on the assets after deducting any liabilities, reliefs, and exemptions.

    A person’s estate includes:

    There are many ways to pay IHT before you are legally obliged to do so. It can be paid from:

    It is payable upon the transfer of the estate to the recipients. Each beneficiary is responsible for paying their own IHT. It depends on the value of the estate they inherited.It falls under the jurisdiction of HMRC (Her Majesty’s Revenue & Customs). It is quite similar to the estate tax because the reason behind both of these is death. However, there are a few differences such as: In estate tax, the tax is applicable on the total estate value of the deceased person. It is paid by the estate of the deceased individual before transferring it to the beneficiaries. In inheritance tax, the tax is applicable to the beneficiaries. It means that the person who inherits the estate of a deceased person is liable to pay IHT.

    How it Works?

    In the UK, there is an inheritance tax threshold of £325,000. It means that anything below this amount will not be affected by IHT. This allowance has remained the same since 2010 and will not change in the tax year 2021/22.

    There is usually no inheritance tax to pay in the UK if:

    1. Your spouse or civil partner

    2. An exempt beneficiary

    If neither of these exemptions applies, you need to pay IHT. Your estate will be taxed at a value of 40% on any assets above the threshold when you die.

    Important Note: Even if your estate value is below the IHT threshold, you’ll still need to report it to HMRC.

    Inheritance Tax Rates Defined

    The tax rate on inheritance in the UK is known as the nil-rate band. It is the threshold above which IHT is payable. This is currently set at £325,000 and will remain fixed at this figure until April 2026.

    In 2017, the government introduced the residence nil-rate band (RNRB). This is an additional amount that can be passed on tax-free against the family home.

    The RNRB is worth £175,000 and can be combined with your existing nil-rate band, meaning that you can leave up to £500,000 tax-free.

    How to Use Residence Nil-Rate Band?

    To use the residence nil-rate band inheritance tax, you must stipulate that you are leaving your home to direct descendants.

    Who Is a Direct Descendent

    For purposes of RNRB, the direct descendant is:

    This also includes:

    Direct descendants do not include those who are not mentioned in the list above such as:

    More than one direct descendant can inherit the home of the person that’s died. The value of the home is shared in proportion among direct descendants.

    Tax on Inherited Property, Money and Shares

    You can pass on the home to your husband/wife/civil partner when you die. And there is usually no capital gains tax on inherited property to pay if you do the above-mentioned. Alternatively, you can choose to leave the home to another person in your will. It will count towards the value of the estate.

    It means that anything they inherit will be subject to inheritance tax.

    You don’t usually have to pay tax on anything you inherit at the time you inherit it. But, you may need to pay:

    1. Rental income from a property

    2. Dividends from shares

    Important Note: If inheriting a home means now you own 2 homes, you will need to mention one of them as your primary home. You must declare to HMRC which home is your primary one within 24 months of inheriting it. To know more about capital gains tax.

    To know more about capital gains tax

    Who Is Liable to Pay Inheritance Tax?

    Any person who receives assets from the estate of someone who has passed away is liable to pay inheritance tax. It is charged only on the portion of your inherited estate that is above the threshold limit.

    For Example:

    For an inherited estate worth £600,000, you don’t need to pay IHT on the entire amount. Your tax-free threshold value is £325,000. The IHT charged will be 40% of £275,000 (the total value minus the threshold value) which is £110,000.

    Important Note:  You can pay inheritance tax at a reduced rate of 36% on some assets. All you need to do is leave 10% or more of the ‘net estate’ to a charity in your will.

    What Is Net Estate?

    It is described as the leftover value of the estate after deducting all the debts such as:

    How are Inheritance Taxes Calculated?

    The executors of your will need to work out the value of all your assets. They are expected to subtract any debts, bills or funeral expenses to calculate the net estate value.
    • Main property
    • Other properties
    • Investments
    • Cash
    • Insurance policies not in trust
    • Other assets (vehicles, house contents, jewellery)
    • Main property
    • Other properties
    • Investments
    • Cash
    • Insurance policies not in trust
    • Other assets (vehicles, house contents, jewellery)
    • Main property
    • Other properties
    • Investments
    • Cash
    • Insurance policies not in trust
    • Other assets (vehicles, house contents, jewellery)

    For expert assistance for calculating inheritance tax due to be paid on your estate.

    Inheritance Tax Planning and Strategies in the UK

    Inheritance tax planning helps you decide what will happen to your estate when you die. It is the best way to ensure that you can reduce your inheritance tax bill.
    Here are some of the key things you should be aware of when planning for your estate:

    Gifts to your partner or spouse

    Married couples and civil partners can pass their assets on to their partners up to a limit. It won’t be subject to inheritance tax.

    Unused allowance over the threshold limit

    Any unused allowance following one person’s death can be carried over to their surviving partner.

    Annual gift allowance

    There is also a £3,000 annual gift allowance that is exempted from inheritance tax.

    Yearly gifts

    You can also give up to £250 every tax year to anybody you know. This is also exempted from inheritance tax.

    Wedding gifts

    In a wedding/civil partnership, you can plan to give inheritance tax-free gifts on the marriage up to:

    • £5,000 to a child
    • £2,500 to a grandchild/great-grandchild
    • £1,000 to any other relative

    Gifts from your income

    You can make gifts out of your normal income, as long as it doesn’t affect your standard of living. You can gift on various occasions such as:

    • Birthday
    • Christmas
    • Regular payments
    • Anniversary presents
    • Life insurance policy premiums

    7 years rule gifts:

    Any gifts made in the previous 7 years may also be liable to inheritance tax. It depends on how much of those prior 7 years have expired. This is known as the 7 years rule. It is suggested by a majority of inheritance tax planning specialists.

    • Gifts to charities : You can make inheritance tax-free gifts of any value to:
      1. Charities
      2. Universities
      3. Museums
      4. Community sports clubs
    • Gifts to political parties: Gifts to political parties (with certain exemptions) are also exempted from inheritance tax.
    • Gifts to assist with family maintenance: General gifts helping your relatives with living expenses are free from inheritance tax.

    If you are looking to make plans for inheritance tax on your estate, let’s connect over a FREE Zoom call. One of our financial advisors will be happy to talk you through your personal situation.

    Rules on Giving Gifts

    Some gifts you make during your lifetime are exempted from inheritance tax. However, you must live for another 7 years after the gifts are made to make it tax-free.
    However, gifts made in the 7 years prior to your death may be subject to inheritance tax depending on:
    An eligible inheritance tax-free gift can include the following:
    However, if you make these gifts and die before the 7-year, IHT will still be charged on the gifts.

    Inheritance Tax-Free Gift Allowance

    While you are still alive, you have an annual inheritance tax free gift allowance worth £3,000.

    This means that you can give away up to £3,000 each year. It will not add to the rest of your estate for inheritance tax
    purposes.

    Furthermore, any part of your annual exemption that hasn’t been used can be carried over. However, it can only be used in the following year and not the year after that.

    To know more about the allowance, & speak with one of our experts.

    Inheritance Tax (IHT) Taper Relief on Gifts Explained

    Taper relief is a percentage reduction in the amount of inheritance tax payable. It does not reduce the value of the gift itself, just the inheritance tax due on it. This means that if there is no tax due on a particular gift, you cannot claim taper relief. Also, you cannot lower the value of the said gift.

    Furthermore, any gift that lies within the nil rate band (£325,000) is not eligible for inheritance tax taper relief. Taper relief is only applicable where:
    The time between the date of the gift and the donor’s death (in years)Percentage inheritance tax taper relief applied to tax due (in percentage)Effective rate of tax on gift (in percentage)
    0–3040
    3-42032
    4–54024
    5–66016
    6–7808
    For more details, you can connect us via Zoom, Skype or Microsoft teams.

    How you can Avoid Inheritance Tax in the UK?

    There are a number of legal ways to avoid inheritance tax in the UK. These help you organise all your assets and remove inheritance tax altogether. However, these IHT saving ways will only work if your financial situation is straightforward. Proper planning and advice from an expert financial advisor are recommended for more complex matters.

    Make a Will

    Writing a will is one of the simplest ways to avoid inheritance tax in the UK. It helps you ensure that your estate goes to the people you want. It allows you to decide how your assets will be managed after you die. It also allows you to plan for and reduce your IHT bill.

    Stay below the Threshold Limit

    In the tax year 2020/21, the inheritance tax threshold is £325,000. Also known as the nil rate band, it is transferable to a spouse or civil partner on death. If the value of your property is below the threshold limit, you pay no IHT as the rate is set at 0%.

    Give away Assets

    Give your assets (not all) such as shares and property away to avoid inheritance tax in the UK. However, you need to survive for at least 7 years. If you die before completing 7 years then inheritance tax will be paid on a reducing scale.

    Put your Assets in a Trust

    If you put your assets into a trust, these no longer belong to you. As a result, these are not included in your estate for inheritance tax. A trust is a separate legal entity. It helps you avoid IHT and protect your assets for your future heirs. You can also take income from your assets after putting these in a trust. All you need to do is put your assets in a trust with interest in possession. It helps you avoid IHT but is still liable to income tax.

    Give away Capital Gains Tax Exempted Assets

    You can give away your assets that have fallen value since you bought these. It helps you avoid paying capital gains tax on inherited property.

    Take out Life Insurance

    You can take out a life insurance policy to avoid IHT. Write your life insurance policy in trust to keep it separate from your estate. It will not directly reduce the amount of inheritance tax. However, an insurance policy will make it easier for your beneficiaries to pay the inheritance tax bill.

    Leave Money to Charity

    There will be no inheritance tax to pay on your estate given to charities. Donating at least 10% of your estate to charities decreases the tax amount due on the remaining. Your tax will be calculated at a rate of 36% instead of 40%.

    Start Giving Gifts Now

    If you earn more income than you spend, you can make gifts from your surplus income. Gifting out of your excess income helps you avoid inheritance taxes in the UK. There are no limits on the number of gifts you can make. However, the gift must come from your income and not the capital.

    Spend your Assets

    Spending helps your estate from getting bigger and producing a larger inheritance tax. It will not only improve your lifestyle but also ensures that you pay less inheritance tax. However, it is essential to find the right balance between spending today and securing your future. you should be careful not to spend your assets too quickly.

    Buy a Funeral Plan

    Funeral expenses are permissible deductions from a person’s estate for IHT purposes. The average funeral cost is between £3,000 to £6,000. Buying a prepaid funeral plan helps deal with this cost upfront.

    FAQ's

    Following are the risks involved in setting up a trust to avoid inheritance tax in the UK.

    Overlooked Details

    Setting up a trust involves complex legal documents and processes. If any of the documents and processes are not completed, your trust can fall short of your goals. Even the smallest mistake can make your trust invalid.

    Unintended Emotional Implications

    Setting up a trust has the potential to cause unfortunate potential emotional friction. Chances are your beneficiaries:

    • Are unprepared for their new responsibilities or tax burden
    • May become furious and resentful over family secrets
    • Cannot agree amicably on how to share a joint asset left in trust
    • Are struggling financially but they are restricted to tap any of their inheritance

    Yes, you can. You have the right to make as many changes in your will as you like. A will can be updated, modified, or amended at any time during your lifetime. It does not affect your right to deal with your property.

    It is known as ademption. It happens when a mentioned item is no longer in the estate of the testator at the time of death. It could have been disposed of, destroyed, lost, or sold during the lifetime of the testator.

    If it happens, the item adeems. It means that the gift item becomes moot and irrelevant. Your beneficiary cannot make any claim on that item or its reimbursed value against you or your estate.

    If the value to your estate is below the inheritance tax threshold limit—£325,000, you don’t need to pay. However, you’ll still have to report to HMRC. For this reason, you need to calculate the total value of the estate.

    Here’s how it’s done:

    • Estimate the market value of all the estate’s assets
    • Deduct any debts—unpaid loans, overdrafts, and mortgages to get the estate’s net value
    • Subtract the value of tax-exempted assets such as:
      • Charities
      • Anything left to spouses
      • Tax-free gifts
      • Life insurance policy
    • Deduct £325,000 (threshold limit) from the value you get after the above step

    You are liable to pay 40% tax on anything that is leftover.

    One of our experts will answer all your questions.