What is inheritance tax?
When it comes to the various taxes you may need to know about, inheritance tax is a major one. However, while most people have heard of it, you may not know exactly what it is and when it applies to you. It really is worth taking the time to know the basics in this area though to avoid any nasty surprises at a later date. This could be for you or your family when you are no longer here.
Inheritance tax – the basics
In simple terms, this is a tax that applied to the estate of someone who has died. Your estate is counted as the property, money and possessions you had upon dying. When your estate is passed on to the people named in your will, inheritance tax may be payable on your estate, if it is of a large enough size. Naturally, this can significantly reduce what they actually get after the tax has been deducted from it. With this in mind, many people who feel they may be affected try to reduce the amount of inheritance tax that will be payable before they pass on.
Who has to pay this tax?
Inheritance tax is chargeable on all individuals who are UK domiciled or have assets in the UK above certain thresholds. With this in mind, it does not affect everyone but is still worth checking out to make sure.
Single individuals
For an unmarried or divorced person, they are entitled to a nil rate band of £325,000. If your total assets and gifts in the past 7 years are below this you are not subject to inheritance tax.
On top of this, if you leave your home to your children or grandchildren (or their children) you are provided with a further relief called the residence nil rate band. This is currently £125,000 and is increasing each year until 2020/21. However, if your estate is worth more than £2m this relief will be tapered and if your estate exceeds £2.25m you will not benefit from this.
This means that a single person leaving a home of at least £125,000 and other assets totalling £450,000 or under is not subject to inheritance tax.
Married Couples
For a married couple (or civil partners), on the first death any transfers to the surviving spouse are exempt. If all assets are passed to the surviving spouse then the allowances mentioned above are also transferred to the spouse. If some are transferred then transferrable allowances are limited.
This means that between a married couple they have 2x nil rate band of £325,000 and 2x residence nil rate band of £125,000. This gives a total allowance of £900,000 as long as there’s a property worth at least £250,000 (subject to the £2m taper above) .
There are also complex rules where properties are downsized or gifted away before death and any gifts made in the past 7 years will need to be counted in the estate.
But what if your estate is above the thresholds? This is where your estate would be liable for inheritance tax.
How much is it?
Any assets above the thresholds mentioned above will be taxed at 40%. Unless you leave at least 10% of your estate to charity (which will be tax free), in which case the remainder of your estate will only be taxed at 36%.
Can the inheritance tax bill be reduced?
Many people whose estates will incur inheritance tax take steps to reduce the expected bill before their death. There are several ways to do this from leaving a legacy to a charity of your choice, setting up a trust to put your assets into and giving away up to £3,000 per year in gifts to anyone of your choosing. All this will help to bring the total value of your estate down and reduce any possible bill.
Where you have considerable exposure to inheritance tax it may be possible to structure matters to help reduce your tax bill considerably and leave more of your hard earned wealth to those you love.
Get in touch today for a free consultation.
If you need more information or help with inheritance tax, give us a call today. We are experts in the field and can help you in this tricky area. If you are based in London or the South East, get in contact to speak to one of our team.
my mother passed away 1st may this year, without writing a will. My father passed away in 2001 she signed the house to myself and brother in 2002, aged 75 but continued to live in the family home (which we have all lived in since 1967) until she passed away.
Having looked on the HMRC website they state this is a gift of reservation and there is tax to pay
Dear Catherine
Unfortunately, as you state if your mother gave you the entire property and remained in it without paying you any rent then she would have had a gift with a reservation of benefit meaning that the property remains in her estate for IHT purposes. This can be avoided where there is shared ownership, but not where the entire property is gifted. On top of this care has to be taken when gifting a property as the new residence nil rate band can only be claimed where there is a gift of property to children (although these rules are very complex and include provisions for gifts and downsizing).
Please do get in touch if you would like to discuss this further.
Anthony