Inheritance Tax Planning
What is inheritance tax?As Benjamin Franklin once said, 'the only things that are certain in life are death and taxes', and this touches on both of them.
When you die, the Government assesses how much your estate is worth, then deducts your debts from this to give the value of your estate. Your assets include:
Your estate will owe tax at 40% on anything above the £325,000 inheritance tax threshold when you die (or 36% if you leave at least 10% to a charity). Dealing with it is one of the biggest single money saving things you can do, as some simple actions can save you hundreds of thousands of pounds. |
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Who pays inheritance tax?
Everyone has an allowance which can be left free of IHT on their death, it is called the 'nil rate band' and in the 2019/20 tax year this figure is set at £325,000. See below for married couple allowances.
Above that amount, anything you leave behind is subject to tax of 40% (or 36% if you leave at least 10% of your assets to a charity).
So for example, if you leave behind assets worth £500,000, your estate pays nothing on the first £325,000, and 40% on the remaining £175,000 – a total of £70,000 in tax - if you're not leaving anything to charity.
Officially, the £325,000 limit has been frozen until at least 2020/21.
Why do we have to pay inheritance tax?
The politics of inheritance tax are among the most controversial around. The idea is that without it you perpetuate inherited wealth, so the children of the rich stay rich. Inheritance tax redistributes income so some of the money goes to the state to be distributed for the benefit of all. The argument against it is that when money is earned tax is paid at the time, so to pay tax on it again isn't fair.
After years of rocketing house prices, many more people have been caught out by the inheritance tax threshold, raising it higher up the agenda. Yet, whatever your views politically, inheritance tax is a financial fact, so it makes sense to know how it will affect you, and whether you can soften the blow.
Am I exempt if I'm married?
When you die, any assets left to your spouse or registered civil partner, provided they’re UK-domiciled, are exempt from inheritance tax. On top of this, your partner’s inheritance tax allowance rises by the amount you didn't leave to others, meaning together a couple can currently leave £650,000 tax-free.
These rules are backdated - so will apply if your partner died before October 2007. The key to how much extra allowance you get relies on the proportion (not the amount) of the allowance that your spouse used.
So, for example, if your partner died in early 2008 and used 50% of their nil-rate allowance at the time of their death, then you will get 50% of the current allowance (i.e. 50% of £325,000) in addition to your personal £325,000.
An example should help explain this:
What if I'm not married?
While transfers of property and other assets between married couples or civil partners don't attract inheritance tax, this isn't the case for unmarried couples.
If you're not married, but own assets jointly with another person, the situation gets complicated, especially where a residential property is involved. Your liability to pay IHT will depend on whether you and your partner own the property as 'joint tenants' or 'tenants in common' and whether there's a will.
If you're joint tenants (you both own all the property), and your partner has left you everything in the will, then if your partner's assets, including the property, exceed the £325,000 inheritance tax threshold, you'd have to pay it on any assets in the estate above that. After your partner's death, your property would then be owned by you in its entirety.
However, if your partner didn't leave a will, his or her family would have a claim to your partner's share, though they wouldn't be able to throw you out of the house. It's especially important that if you own a property with someone who isn't your husband/wife or child, then you need to make a will describing exactly who benefits on your death.
Can I reduce the tax bill in any other way? Yes you can; speak to us, we have a number of ways that a potential IHT bill can be reduced or eradicated all together.
Everyone has an allowance which can be left free of IHT on their death, it is called the 'nil rate band' and in the 2019/20 tax year this figure is set at £325,000. See below for married couple allowances.
Above that amount, anything you leave behind is subject to tax of 40% (or 36% if you leave at least 10% of your assets to a charity).
So for example, if you leave behind assets worth £500,000, your estate pays nothing on the first £325,000, and 40% on the remaining £175,000 – a total of £70,000 in tax - if you're not leaving anything to charity.
Officially, the £325,000 limit has been frozen until at least 2020/21.
Why do we have to pay inheritance tax?
The politics of inheritance tax are among the most controversial around. The idea is that without it you perpetuate inherited wealth, so the children of the rich stay rich. Inheritance tax redistributes income so some of the money goes to the state to be distributed for the benefit of all. The argument against it is that when money is earned tax is paid at the time, so to pay tax on it again isn't fair.
After years of rocketing house prices, many more people have been caught out by the inheritance tax threshold, raising it higher up the agenda. Yet, whatever your views politically, inheritance tax is a financial fact, so it makes sense to know how it will affect you, and whether you can soften the blow.
Am I exempt if I'm married?
When you die, any assets left to your spouse or registered civil partner, provided they’re UK-domiciled, are exempt from inheritance tax. On top of this, your partner’s inheritance tax allowance rises by the amount you didn't leave to others, meaning together a couple can currently leave £650,000 tax-free.
These rules are backdated - so will apply if your partner died before October 2007. The key to how much extra allowance you get relies on the proportion (not the amount) of the allowance that your spouse used.
So, for example, if your partner died in early 2008 and used 50% of their nil-rate allowance at the time of their death, then you will get 50% of the current allowance (i.e. 50% of £325,000) in addition to your personal £325,000.
An example should help explain this:
- Let’s say Mr Wayday had passed away some years before Mrs Wayday, back when the nil-rate allowance was only £250,000.
- He gave £50,000 to each of his three children, meaning £150,000 had been used – 60% of his allowance. All the rest went to Mrs Youngatheart.
- When she dies, of course she can now pass on £325,000 free of tax due to her own allowance.
- Yet she can also pass on the unused amount of Mr Youngatheart’s allowance.
- He didn’t use 40% of his, so she gets another 40% of the current nil-rate amount, ie, £130,000, without paying tax.
- This means her total nil-rate band is now £455,000.
What if I'm not married?
While transfers of property and other assets between married couples or civil partners don't attract inheritance tax, this isn't the case for unmarried couples.
If you're not married, but own assets jointly with another person, the situation gets complicated, especially where a residential property is involved. Your liability to pay IHT will depend on whether you and your partner own the property as 'joint tenants' or 'tenants in common' and whether there's a will.
If you're joint tenants (you both own all the property), and your partner has left you everything in the will, then if your partner's assets, including the property, exceed the £325,000 inheritance tax threshold, you'd have to pay it on any assets in the estate above that. After your partner's death, your property would then be owned by you in its entirety.
However, if your partner didn't leave a will, his or her family would have a claim to your partner's share, though they wouldn't be able to throw you out of the house. It's especially important that if you own a property with someone who isn't your husband/wife or child, then you need to make a will describing exactly who benefits on your death.
Can I reduce the tax bill in any other way? Yes you can; speak to us, we have a number of ways that a potential IHT bill can be reduced or eradicated all together.