Inheritance tax is arguably one of the most disliked taxes in the UK. Though it raises far less income for the Government than VAT or income tax, it causes much ire because it is seen as another tax on earnings which have already been taxed. Whatever your view on the controversial tax, you need to take the necessary steps to ensure your family does not lose out when you pass away.
How is Inheritance Tax Calculated?
Upon death, the value of all an individual’s assets is established, with any debts they owed deducted. Gifts that the individual had made in the past seven years, such as those to grandchildren are taken into account, as are any gifts they themselves might have been receiving.
Tax is then calculated. The first £325,000 is subject to 0% tax, which is called the ‘Nil Rate Bond’ (NRB). A new family home allowance is being phased in meaning that by 2020/21 a further £175,000 will be added to your NRB if you give your home to children or grandchildren. Couples will then have a joint NRB of £1 million. However, this benefit will not be available to households valued at over £2 million.
Some tax exemptions are in place, if, for example, an individual leaves their entire estate to a spouse or civil partner, but such exemptions are not available to two people who simply live together. Another advantage for married partners is that if one should die before the other, any unused NRB will pass to the surviving spouse.
Can I Take It With Me?
Of course, you can’t take your estate with you when you die, but giving it away is harder than you might expect. There is a seven year period in place before your death in which any gift you make will be subject to tax. This is enforced to prevent individuals giving away their house and money before they die without paying any inheritance tax. Small gifts can still be made, however, out of surplus income up to a value of £3000. Other exceptions may also be in place for special one-off gifts, but you should check whether these apply to your circumstances.
Use of a Trust
Typically, trusts are used to make gifts to a spouse and safeguard your assets both on your death and the death of your spouse. Your money goes to the intended recipients (your children or grandchildren) rather than the new partner of your spouse, should they remarry.
Make a Will
Making a will is absolutely essential as it establishes what you want to happen to your estate when you die. This will prevent needless arguments and costs after your death. You should ensure that your will is kept up to date so that your current wishes and circumstances are suitably reflected.
…take advice from a qualified tax advisor. If you are looking for an expert team of tax consultants, Salford based MCC Accountants have been helping clients with their tax planning both in relation to their business and their other assets for more than ten years. We would be happy to set up an initial meeting with you.
Please call us on 0161 707 1500 or use our contact form to get in touch.