Do you know whether you will leave an inheritance tax bill for your family or not? There are a few things you need to understand before the question can be answered.
What is Inheritance Tax?
Inheritance Tax (IHT) is a tax on the estate of someone who has died, including all property, possessions and money. The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the tax-free threshold which is currently £325,000.
How to value the estate
The first step is to calculate the value of your estate, you may be surprised what is included. For example, any gifts made to loved ones in the previous seven years could be included.
Add up the value of your property, savings, investments, and any other assets like cars, antiques, jewellery, shares, a payout from an insurance policy and jointly owned assets, and also any value you may have within a trust. Gifts also need to be included, such as cash or other assets, if they were given away in the seven years before the person died. In certain circumstances, you might need to go back 14 years.
You don’t pay inheritance tax on the full value of your estate as there are tax-free allowances to consider before the tax is calculated. This is known as the “Nil Rate Band”. The allowance is £325,000 and means that tax is paid on the value of assets over and above this level.
There is another allowance of £175,000 relating to property but it has some rules around it and therefore does not always apply. If you add both allowances together, you can potentially leave £500,000 tax free. It is vital that you take advice in relation to this additional allowance to find out if you qualify.
If you are married or in a civil partnership you can leave everything to each other completely tax free from inheritance tax however there is still a need for planning as there would be a liability on second death.
The good news is that if everything is left to each other the partner can make use of the unused allowance, this means they can potentially leave £1 million tax-free.
Plan now for the future
If you want to save your loved ones from having an unnecessary tax bill it is important to plan ahead. There are many ways to reduce or prevent an inheritance tax bill.
It can be complicated, so it’s worth getting expert advice to help you make the right decisions.