inheritance

Nowadays inheritance tax is a bit of a political hot potato with some politicians calling for the ‘death tax’ to be scrapped. Many people are not sure about how inheritance tax works and if inheritance tax would affect their family. Some people stress about the tax and others take the attitude that as it is a death tax it isn’t something that is a big priority.  Our Will solicitors spend their days talking about IHT. They explain what it is, how much your estate could end up paying in tax, and the steps you can take to reduce the IHT payable by your estate. Will solicitors say it is in the best interests of your family and loved ones that you carry out some estate planning. By taking what are often simple steps you will leave more of your estate to your chosen beneficiaries rather than to the tax man. To most people that is a ‘no-brainer.’  For expert Will and estate planning advice complete our online enquiry form.   Who pays inheritance tax?   Inheritance tax (IHT) is payable on a deceased’s estate if the estate is not inheritance tax exempt. Whilst IHT is not a tax that you need to pay during your lifetime there are steps you can take to reduce the IHT liability on your estate. Will solicitors refer to this as estate planning or IHT mitigation.  If you do not engage in estate planning your estate may have to pay a tax bill of 40% of the net value of your estate after considering 2 thresholds:  The IHT threshold of £325,000  - all estates only pay IHT if the estate is valued at more than £325,000. The first £325,000 of an estate is referred to as the nil rate band or NRB  The residence nil rate band of £175,000 – your estate may qualify for an additional £175,000 in nil rate band if you own a property and you are passing it on to your child or grandchildren. If the residence NRB applies to your estate then your net estate will only pay IHT on anything over the first £500,000 ( the £325,000 is added onto the £175,000)  The rate of IHT can be reduced to 36% if you leave at least 10% of your estate to charity.  Calculating the value of your estate  Will solicitors say that you should not assume that your estate will not need to pay IHT if your estate is currently worth less than £325,000 or £500,000. That is because the value of your assets may go up at a faster rate than the government IHT thresholds or the thresholds could even be scrapped.   There can also be confusion about what assets are included in your estate to calculate your estate’s IHT liability. For example:  An insurance policy payment may fall outside your estate because of the wording of the policy  A gift given to a family member may have a percentage of its value added back into your estate if you died within 7 years of making the gift  When a probate solicitor is dealing with an estate administration, they will advise you on IHT liabilities and when any inheritance tax is payable.  Exempt estates  Some estates are exempt from paying IHT. This can be down to one of several factors:  The estate is valued at less than £325,000 (or £500,000 if the estate qualifies for the residence nil rate band of £175,000 on top of the standard IHT threshold of £325,000). The value of the estate could be less than £325,000 because the deceased made lifetime gifts to friends and family and survived for 7 years after making the gift  The estate is left to charity   The estate is left to a husband, wife, or civil partner. This is referred to as the spouse exemption. When the second spouse passes away their estate can use the first spouse’s nil rate band of £325,000 as well as their own so their estate only pays IHT on the value of the estate over £650,000 . [related_posts] Reducing your inheritance tax bill  There are several ways that you can legitimately reduce the potential inheritance tax bill that your estate may end up paying.   One of the more radical IHT suggestions is to get married if you are living with a partner in an unmarried relationship. If you leave your estate in your Will to your new husband or wife then the spouse exemption will apply so no inheritance tax is payable. For an estate worth 1 million, with a nil rate band of £325,000, that is a potential tax saving of £270,000. Before you marry you could decide to sign a prenuptial agreement to safeguard your family money in case of separation or divorce during your lifetime.    Other less radical options include leaving a percentage of your estate to charity to reduce the tax rate from 40% to 36% or using your annual allowance to make gifts to family members.  There are other ways you can reduce your inheritance tax bill. A Will solicitor can explore them with you and work out which ones are suitable for your financial and family circumstances. At the same time, they can review your existing Will to make sure it remains fit for purpose and is tax efficient. If you don’t have a Will then one can be prepared for you.   For expert Will and estate planning advice complete our online enquiry form.