Inheritance Tax can potentially be a worrying burden for many people. Without sufficient planning, you could be liable to pay a sizeable amount of Inheritance Tax, leaving less to your loved ones. However, there are many legal provisions you can take advantage of that will enable you to plan your estate and reduce the worry for you and your loved ones.
If you have any queries relating to your personal situation, then please contact us at Thornton and Baines, and one of our financial advisors will be able to guide towards the best course of action to take regarding your personal estate.
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What is Inheritance Tax?
Inheritance Tax is a tax paid on the estate of someone who has recently died. The current IHT threshold is £325,000, meaning that anything below this amount is not taxable. Anything over this amount is subject to a 40% tax.
For example, if you had an estate worth £675,000, you would be required to pay £140,000 in IHT (675,000 – 325,000 = 350,000 40% of 350,000 = 140,000)
If you had an estate worth £925,000, you would be required to pay £240,000 in IHT (925,000 – 325,000 = 600,000 40% of 600,000 = 240,000)
Whilst this may seem like a large portion of your estate to be giving away, there are two common ways in which you can reduce this bill.
1. Leaving your estate to a spouse or civil partner
People who are married or civil partners do not have to pay any Inheritance Tax on the estate left to them by their spouses. The residence nil-rate band can also be left to spouses, increasing their own nil-rate band.
For example, Mr Nicholls has recently passed away, leaving behind his widow Mrs Nicholls and their three adult children. In his will, he stipulated that he wished to leave everything to his wife, meaning that there is no Inheritance Tax to pay on his estate. It also means that Mrs Nicholls has inherited her husband’s residence nil-rate band, meaning that her own residence nil-rate band will be £650,000 when she passes away (her personal residence nil-rate band of £325,000 + Mr Nicholl’s residence nil-rate band of £325,000).
If the deceased spouse has used up part of their tax-free allowance, then the remaining nil-band rate would be added on to that of the surviving spouse.
For example, if Mr Nicholls used up £150,000 of his residence nil-rate band, £175,000 would be added on to Mrs Nicholls’ nil-rate band, increasing her total to £500,000 (325,000 + 175,000 = 500,000).
2. Donate part of your estate to charity
The standard tax rate of 40% is reduced to 30% if you state in your will that you wish to leave at least 10% of your estate to charity. Anything less than this will not qualify for a reduced tax rate.
For example, in Mrs Johnson’s will she stated that she wished to leave 20% of her estate to charity. As her estate totalled £850,000, she ended up paying £157,000 in Inheritance Tax (850,000 – 325,000 = 525,000 30% of 525,000 = 157,000).
Alternatively, Mr Thomas stated in his will that he wanted to leave 6% of his total estate to charity. As this is below the 10% threshold, he would still need to pay the full tax rate of 40% on his estate when he died.
If you have any queries regarding the makeup of your estate and what this could look like when you pass away, one of our advisors at Thornton and Baines will be happy to give you some advice over a free Zoom call.