This article was published on January 18th, 2019
Britain’s top 10 inheritance tax hotspots have recently been revealed, with Guildford topping the list. The report revealed that there were 658 estates that incurred an average of £231,003 in inheritance tax and in total estates in Guildford paid £152 million in Inheritance Tax.
As the figures show, inheritance tax can be substantial and can potentially cost loved ones thousands of pounds once you have passed away.
However, if you plan correctly you can ensure that you can legally save thousands of pounds on your estate inheritance tax bill.
In this article, we discuss what inheritance tax is, how it works and whether or not you may have to pay it.
Inheritance tax can be charged on assets transferred into a trust or, more commonly, on the estate of someone who is deceased. An estate includes any property, money and/or possessions of someone who has passed away. It can also include the value of any gifts made in the 7 years before death
An estate will only attract inheritance tax if the value of the estate is £325,000, this is known legally as the Nil Rate Band (NRB) and the assets do not pass to a spouse or charity. If the value of the estate exceeds this then anything over this value will be taxed at 40%.
As well as the standard Nil Rate Band, there is the Residence Nil Rate Band (RNRB) which is an allowance of £125,000 on top of the NRB. The idea behind this allowance is to help individuals reduce the amount of inheritance tax that is paid against your home. In order to qualify for the RNRB, you must leave a portion or the entirety of your home to your children, stepchildren or grandchildren.
If your estate is eligible for both the NRB and RNRB then you will, in the 2018/19 tax year have a total of up to £425,000 which will be exempt from any inheritance tax. The RNRB threshold is to increase further by the tax year 2020/21 and will be £175,000.
When you pass away, any assets that you leave to your spouse or civil partner will be exempt from inheritance tax and your total allowance will rise from £425,000 (this is the NRB and RNRB) to £900,000 (this includes your personal allowance as well as the allowance of the deceased spouse or partner).
Should the estate that you inherit from a spouse or civil partner exceed the £900,000, then the 40% tax tariff will come into force. For example, if the value of the estate is £1million and it is all left to the spouse or partner, then they will pay £40,000 in inheritance tax (40% of the £100,000 that exceeds the £900,000 allowance).
One of the common myths surrounding inheritance tax is that it can be avoided altogether if you give away all your money and assets before you die. However, it is not that simple.
If you do decide to give away or ‘gift’ all of your cash and assets to other people or organisations, then according to the law, you must live for 7 years or more after you have given the gift in order for it to be exempt from inheritance tax.
If you die before the 7 years are up, then the gifts or gifts will be added to the value of the estate assets and may result in a tax charge.
However, there are a few ways that estate planning can help. For example, an individual can give away up to £3,000 a year to whoever they like and this £3,000 gift will be exempt from inheritance tax.
Likewise, it’s also possible to give £250 to as many people as you like in any tax year, however, you cannot give £250 to someone you have already gifted £3,000 to as the £250 will be subject to inheritance tax.
Gifting from surplus income is a tax-exempt method of gifting and, provided it is documented carefully, can effectively reduce an estate’s value over time.
You can also reduce your inheritance tax rate by 4% to 36% if you give away at least 10% of your estate to charity in your Will.
As you can see from the points outlined above, estate planning can become very complex, particularly if you intend on leaving portions of your estate to several people and/or organisations.
By enlisting the assistance of one of our specialist private client solicitors you can ensure that your estate planning is completed swiftly and professionally.
Our team will be able to advise you on what steps you can take to ensure your wishes are respected after you have passed away and that your estate will be affected as minimally as possible by inheritance tax.
Our team have created an estate planning checklist that you can view by clicking here.
In order to ensure that you are fully prepared, our private client team which is led by Heather Gaunt – a member of the Society of Trust and Estate Practitioners (STEP), will be able to advise you throughout the estate planning process, whether it be creating or amending your will, discussing a Lasting Power of Attorney, or sharing advice about how you could benefit from using a trust to protect your assets.
Our private client team have a wealth of experience and understand that planning what you would like to do with your estate after you have passed can be a very difficult and emotive subject. Your legal needs will be handled with the utmost care and consideration.
If you would like to discuss your estate with a member of our team, then call us for free today on 0800 1979 345 or alternatively you can get in touch by completing our online enquiry form and a member of our team will get back to you at a time that is more suitable for you