Inheritance tax is affecting more and more UK residents, as housing prices continue to rise but the inheritance tax threshold does not increase in line with them. As such, a greater number of people are finding that they need a simple guide to inheritance tax, to help them understand whether their estates will be liable to pay the tax and what they can do to reduce the financial burden.
When you pass away, your estate may be subject to inheritance tax (IHT). This will depend on the value of your estate, including all assets such as property and wealth, and also includes gifts made in the seven years leading up to your death (which may be covered by exemptions).
- The nil-rate band is £312,000. The value of your estate up to this amount is free from tax.
- Value in excess of the first £312,000 is subject to a 40% tax rate.
There are many different ways to reduce the amount of your estate that is taxed. This is primarily done through exemptions, including the following:
- There are numerous exemptions available on gifts given in the previous seven years, including a £3,000 annual exemption, £250 small gifts exemption per recipient per year, and wedding gifts.
- Charitable donations, and donations to political parties, are exempt.
- Spousal exemptions mean that should your spouse or civil partner inherit your estate, they are free from IHT on the inheritance.
There are also potentially exempt transfers – PETs. These are gifts and asset transfers in the seven years preceding your death that are not already exempt for other reasons. Over the course of seven years they become liable for lower levels of taxation and, should you survive the full seven years, they become exempt.
IHT costs can also be reduced by the use of trusts and life assurance to remove portions of wealth from your estate and render them free of inheritance tax. This can be a complex process and some trusts will still be liable for an immediate inheritance tax payment.
Although this is a simple guide to inheritance tax, we can offer you a free, no obligation first consultation with qualified financial consultants. Just fill out our online form and we will put you in touch with expert UK professionals who can offer you advice on inheritance tax matters.