How does inheritance tax work in the UK?

Find out what inheritance tax is, who pays it, and why it exists in the first place.

Inheritance tax is affecting more families than ever before, with many not properly understanding the tax they are paying, why they are liable, or how tax could have been saved.

In April 2016, it emerged that then PM David Cameron might have avoided inheritance tax on gifts from his mother totalling £200,000 a year after his father’s death.

The news prompted wider coverage of inheritance tax stories, including a piece by the Telegraph revealing that IHT receipts had reached a record high.

So how does inheritance tax work in the UK, and will you be liable to pay it?

What is inheritance tax?

Inheritance tax is a tax on the assets, or estate, of a person when they die.

Your estate is made up of a range of assets, including money in your bank, investments and savings, property and vehicles, etc.

When you die, it is necessary for your executors to calculate the value of your assets minus any liabilities you may have had. The gives the total value of your estate.

Who pays inheritance tax?

If the value of your estate is below the £325,000 threshold, there will be no inheritance tax to pay. This threshold is called the “nil-rate band”.

If the estate value is more than the threshold, then you will be required to pay tax at 40% of the value exceeding the threshold. However there are exemptions and reliefs available so it is important to take legal advice to ensure that you can maximise the value of your estate for those who are to inherit it.

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How much inheritance tax is your estate liable to pay?

Additionally there are several other circumstances to consider that can affect how much inheritance tax your estate is liable to pay:

  1. If you leave at least 10% of your assets to charity, the rate of inheritance tax is reduced from 40% to 36%.
  2. If you pass assets to a spouse or registered civil partner when you die, these assets are exempt from inheritance tax. You can also pass any unused inheritance allowance to them.
  3. You can “gift” assets to a beneficiary before your death and as long as you live for at least seven years after the gift was made it will be exempt from inheritance tax.
  4. If you die in active service in the armed forces, your estate might be completely exempt from inheritance tax.
  5. A new “residence nil band” was introduced in 2017. This is being phased in gradually, starting at £100,000 per person and rising incrementally to £175,000 per person by 2020 when your main home is left to a direct descendant.

It’s important that these additional circumstances are taken into consideration when inheritance planning. We are happy to discuss whether or not your estate is eligible for reduced inheritance tax rates – get in touch with our Wills specialists.

Why do we pay inheritance tax?

Inheritance tax exists as a means of redistributing wealth throughout a country.

It means that inherited wealth does not stay exclusively within a family but is made available to the government to use as it sees fit for the betterment of the country as a whole.

Historically, inheritance tax was a tax felt exclusively by the richest levels of society. In the UK, recent factors like increasing house prices have meant that increasing numbers of people are finding themselves liable who may not know that they are liable and, with little understanding of what inheritance tax is or how they could have taken steps to reduce it earlier. In fact, being prepared could potentially save £100,000s in tax in the long run.

By taking advice from an experienced inheritance tax solicitor, it is possible to reduce the amount at which your estate is taxed.

To find out more about how you could reduce inheritance tax, speak to Fiona by calling 01865 987781 or request a call back below.

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