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What is Inheritance Tax? Everything you need to know

What is Inheritance Tax?

Inheritance Tax is a tax imposed on the total estate of someone who has recently passed away. This includes any property, money or possessions the deceased owned when they died.

There is usually no Inheritance Tax to pay if:

  • You have an estate that is below the Inheritance Tax threshold of £325,000
  • You choose to leave everything above the £325,000 threshold to your spouse or civil partner.

If neither of these exemptions apply, then your estate will be subject to a tax of 40% on any assets over the £325,000 threshold when you die. If you decide to leave at least 10% of your estate to charity, the taxable amount decreases to 36%.

It is also important to remember that even if your estate is below the £325,000 threshold and therefore exempt from Inheritance Tax, it still needs to be reported to HMRC.

Are there any exemptions from Inheritance Tax?

People employed in certain ‘risky’ roles and who may die in active service are exempt from paying Inheritance Tax in the UK. These include armed force personnel, police, firefighters, paramedics and humanitarian aid workers.

This exemption also becomes functional if a person’s death is advanced through an injury sustained during active service, even if they are no longer on said service.

What happens if I inherit my parent’s home?

There is no change to the current £325,000 threshold for the 2021/22 tax year, meaning that there will still be a 40% Inheritance Tax imposed on anything over this amount. However, if you decide to leave your estate to direct descendants such as children or grandchildren, the amount of Inheritance Tax you pay decreases.

Why is this?

The amount of inheritance tax you will need to pay is reduced because you gain two tax-free allowances if you leave your estate to direct descendants. These are:

  • £325,000 – this is the standard inheritance tax allowance, which still applies
  • £175,000 – since 2015, there has been in place what is known as the ‘residence nil-rate band, also known as the ‘main residence band’.

What is the residence nil-rate band?

This an additional allowance you will receive as well as the existing standard inheritance tax allowance of £325,000 if you choose to leave your home to children or grandchildren.

However, it is important to remember that:

  • The £175,000 allowance is only applicable to estates worth less than £2 million
  • For estates worth £2 million or more, the main residence allowance will lower by £1 for every £2 above the £2 million value of the estate.

What happens if I inherit my partner’s estate?

  • When you die, any assets left to your spouse or civil partner are exempt from inheritance tax, as long as they are living in the UK
  • Your partner’s inheritance tax-free allowance increases by the amount of your allowance you didn’t use. This means that, together, a couple can leave £1m free from inheritance tax

If you have any queries about how inheritance tax may affect your personal situation when you die, one of our financial advisors at Thornton and Baines will be happy to offer you some advice over a free Zoom call. Find us here at: https://inheritance-tax.co.uk/contact-us/

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