Without proper estate planning provisions in place, Inheritance Tax can end up costing families thousands of pounds- the last thing they should have to worry about following the death of a loved one.
The amount you pay depends on the value of the deceased’s estate, which is calculated based on their assets (cash in the bank, investments, property, business, vehicles, life insurance payouts) minus any debts they owe.
Do I Have to Pay Inheritance Tax?
Generally, you won’t have to pay inheritance tax if:
The value of your estate is below £325,000
You leave everything over £325,000 to your spouse, civil partner, a charity or a community amateur sports club.
If neither of the above applies, your estate will be taxed at 40% on anything above the £325,000 threshold (or 36% if you leave a minimum of 10% of the value after any deductions to charity in your will).
How Can the Inheritance Tax Threshold be Increased?
The £325,000 tax-free threshold can actually be increased depending on your circumstances- in fact, it can even be as high as £500,000 or £1 million in some cases.
Main Residence Band
You can increase the inheritance tax threshold by taking advantage of the residence nil-rate band- more commonly known as the main residence band.
This gives you an additional £175,000 allowance if you pass on a main residence to your children or grandchildren.
This means your inheritance tax may not be due on the first 500,000 of your estate depending on who you decide to leave your home to.
However, the £175,000 main residence allowance only applies if your estate has a value under £2million. On estates worth more than this, the main residence allowance decreases by £1 for every £2 about £2million that the estate is worth.
Additionally, your home won’t qualify for the allowance if it is in a discretionary will trust, no matter who the beneficiaries are.
What About if I’m Married?
The rules for those in married couples or civil partnerships state that when you die, any assets you leave to your spouse or registered civil partner living in the UK will be exempt from inheritance tax.
Your partner’s inheritance tax allowance also rises by the percentage of your allowance that you didn’t use, so in theory a couple could leave £1million tax-free.
Give the Gift of £3,000
You are able to give £3,000 away each tax year, inheritance tax-free. You can also carry this forward one year if you don’t give it away in the current year.
Gift Charities and Political Parties
If you’re feeling charitable, or want to support your political party, you can give unlimited gifts to charities and political parties completely tax-free.
You can give up to £250 per person as gifts each year and it will be excluded from inheritance tax. This also doesn’t count towards your £3,000 annual gift exemption, however you cannot combine gifts for the same person.
For example, someone may give their child £3,000 as a gift each year, however, they wouldn’t be able to give the same child an additional £250, so may choose to give £250 to each of their grandchildren as an annual birthday present.
If someone you know is getting married, you are able to give them gifts up to a certain amount that are inheritance tax-free.
- If it is your child getting married, you can give them up to £5,000 as a wedding gift.
- If your grandchild is getting married, you are able to give up to £2,500.
- If it is anyone else getting married, you can give up to £1,000.
In order for the gift to be inheritance-tax free, it must be given shortly before the day of the wedding or civil partnership ceremony and the marriage must go ahead.
Helping Your Children go to University
You are able to contribute to your children’s living costs and university tuition fees with no limit on the amount you give so long as they continue in full-time education or training.
For more advice on reducing your inheritance tax, speak to our Estate Planning experts at Ryans Chartered Accountants who can help with efficient personal tax planning.