Inheritance tax is an important consideration in estate planning and transferring wealth to your beneficiaries. Understanding the thresholds, rates, exemptions and planning strategies will help reduce the impact of taxes on your loved ones.
What is Inheritance Tax?
Inheritance tax is a tax imposed by governments on the value of an individual’s assets after their death. This is usually calculated based on the total value of assets, including property, investments, cash, and personal possessions. It’s the responsibility of the executor or personal representative of the deceased’s estate to ensure that inheritance tax is paid.
The primary purpose of inheritance tax is to generate revenue for the government. It helps fund public services and contributes to maintaining economic stability. Additionally, inheritance tax aims to address issues of wealth inequality by redistributing wealth across generations.
Inheritance tax Thresholds
Normally, Inheritance tax isn’t paid if the estate’s value is under £325,000 or if you leave everything over that threshold to a spouse, civil partner or to charity.
However, if you give your home to your direct descendent, your threshold increases to £500,000. A standard inheritance tax rate of 40% is charged on the part of the estate that surpasses the threshold, but there are reliefs and exemptions that can apply.
Who is a direct descendant?
For residence nil rate bad purposes, the direct descendant is:
- A child, grandchild or other lineal descendant;
- A spouse or civil partner of a lineal descendant (including their widow, widower or surviving civil partner).
This also includes:
- A child who is, or was at any time, their step-child;
- Their adopted child;
- A child fostered at any time by them;
- A child where they’re appointed as a guardian or special guardian when the child is under 18.
The person who inherits the home doesn’t have to be under 18. A person’s step-child is only someone whose parent is, or was, the spouse or civil partner of the person.
Direct descendants don’t include nephews, nieces, siblings and other relatives who aren’t in the list above.
Certain gifts that you give whilst alive can be taxed after you pass, depending on particular factors, as we detailed in our previous post on Making use of allowances to reduce your inheritance tax liability. Little has changed since then: if a gift is given less than seven years before you die it can be taxed depending on who you give the gift to, the value of the gift and when it was given.
Things that count as a gift include:
- Household and personal goods;
- A house, land and buildings;
- Stocks and shares on the London Stock Exchange;
- Unlisted shares you held for less than 2 years prior to your death;
There are other reliefs and exemptions that may apply, such as a Business Property Relief, which we can advise on.
How to limit Inheritance Tax
There are different ways to minimise how much UK inheritance tax your beneficiaries will have to pay by planning out your estate well in advance. Some things you can do are:
- Lifetime Giving. Making gifts during one’s lifetime can reduce the taxable value of the estate. Various gifting allowances and exemptions may apply, allowing individuals to pass on assets without incurring inheritance tax.
- Utilising Exemptions. Taking advantage of exemptions and allowances provided by the tax authorities can significantly reduce the inheritance tax burden. Understanding the rules and regulations surrounding these exemptions is crucial for effective estate planning.
- Life Insurance. Acquiring life insurance policies written in trust can provide funds to cover any potential inheritance tax liability. This can help beneficiaries avoid the need to sell assets to pay the tax.
Your Inheritance Tax thresholds
Our Wills and Probate team is always happy to discuss the best way of dealing with your estate. Everyone is different, and the provisions of all our Wills should differ too.