Inheritance tax is one of the most disliked taxes in the UK, and probably the rest of the world too, but we are only concerned with the UK. Although it raises much less in tax than for example VAT and income tax, it seems to cause much greater resentment amongst the small number of people who have to pay it.
It is the sense that as people have paid tax on their earnings throughout their life, why should they be taxed for a second time when they die? Whatever your personal feelings, you should certainly take steps to deal with any issues so that your family does not lose out unnecessarily when you do pass away.
How is Inheritance Tax Calculated?
On the day of death, the value of all that a person owns is added together and any debts that they have are deducted. Any gifts that they have made in the last 7 years are included in the calculation as are any gifts they were benefiting from.
Exceptions include leaving everything above the tax threshold to your spouse, civil partner, a charity or sports club. If you give your home away to your children the tax threshold is raised to £450,000.
Tax is then calculated as follows:
- First £325,000 is subject to 0% tax called the Nil Rate Band or 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. Estates worth more than £2 million are having this withdrawn. So couples will end up with a joint NRB of £1 million.
Marital status is important, if you simply live with a partner then you will not receive the same exemptions as a spouse or civil partner and can end up paying tax of 40% over the NRB value.
Another important benefit for married partners is that if one dies before another, their unused NRB will pass on to their surviving spouse potentially doubling it to £650,000.
Can I take it with me?
It’s the age old question and some have even tried but even though you can’t take it with you, giving it away is harder than you think. There is a 7 year period before your death in which any gift will be subject to tax. This stops you simply giving your house and money to your children before you die.
Smaller value gifts of £3,000 that are from surplus income aren’t included in this so you can make some small gifts each year. There are some other exceptions for special one off gifts too that may apply.
Use of a Trust
Trusts are generally used to make gifts to a spouse and safeguard your assets both on your death and the death of your spouse so that your money goes to your intended recipients and not the new partner of your spouse should they remarry after you die.
This means you can make sure your own children benefit in time after both you and your partner have died.
Make a Will
Making a will is essential as it lays out what you want to happen and helps avoid unnecessary costs and arguments. Keep it up-to-date so it reflects your current wishes and circumstances.
Above all take advice from a qualified tax advisor or consultant. We have been helping clients with their tax planning both in realtion to their business and their other assests for more than ten years so 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.