Thinking about what happens to your estate once you’ve passed away can be a daunting and overwhelming prospect. The rules of inheritance tax can be confusing if you aren’t aware of the finer details. This guide provides a breakdown of the key things you need to know, and our advisors at Thornton and Baines are always happy to give you a consultation to talk through any queries you have regarding your estate.
What is Inheritance Tax?
Inheritance Tax (IHT) is a tax on the estate of someone who has passed away. A person’s estate will include any properties they may own, money they have, as well as any other high value possessions. There is a threshold of £325,000 and anything below this is not subject to IHT. This allowance has remained the same since 2010. The standard IHT rate is 40%.
So, for example, if your estate was valued at £900,000, your tax free threshold would be £325,000. The Inheritance Tax charged will be 40% of £575,000 (£900,000 – £325,000).
To summarise, there is normally no IHT to pay if either:
- The value of your estate is below the £325,000 threshold
- You choose to leave everything above the £325,000 threshold to your spouse or civil partner.
If your estate’s value is below the threshold, it will still need to be reported to HMRC. One of our advisors at Thornton and Baines can assist you if you are unsure if the value of your estate is below the threshold.
Here are some of things you may need to consider when deciding what happens to your estate when you die.
Passing on a home:
- You can pass on a home to your husband/wife/civil partner when you die and there is usually no IHT to pay if you do this.
- Alternatively, if you choose to leave the home to another person in your will, this counts towards the value of the estate
For example, if your property is valued at £700,000 and you stipulate in your will that you want to leave it to a friend, there will be IHT to pay on the property.
Furthermore, if you own your home or your share in it, your tax free threshold can increase from £325,000 to £500,000 if:
- You leave it to your children (including fostered, adopted, or stepchildren) or grandchildren
- Your estate is worth less than £2 million
If your permanent residence is abroad, IHT is only paid on UK assets. This includes any properties or bank accounts you have in the UK. This excludes:
- Foreign currency accounts
- Overseas pensions
- Any holdings in authorised trusts or investment companies
Furthermore, the taxman will treat you as a UK resident if you either:
- Lived in the UK for 15 of the last 20 years
- Had your permanent home in the UK at any time in the last 3 years of your life
Taxes on property, money and shares you inherit
You don’t usually have to pay tax on anything you inherit at the time you inherit it. However, you may need to pay:
- Income tax on any profit you later earn from your inheritance, such as dividends from shares or rental income from a property
- Capital Gains Tax if you later sell shares or property you inherited