What you need to know about inheritance tax
Inheritance tax has hit the news recently. With house prices rising, thousands may be stung with tax bills as more and more people enter the inheritance tax bracket for the first time. Inheritance tax can cost loved ones thousands of pounds in the event of your death and yet it is possible to reduce these payments with the correct financial advice. The most important thing is to be clued up about all the implications involved with inheritance tax. This quick and simple guide will help you get started.
What is inheritance tax?
When you pass away, the Government works out how much your estate is worth. This includes any money you have in your bank account, any investments you have, property and business you own and even payouts from insurance. Once it's deducted your debts, the Government works out the value of your estate. If this value exceeds the inheritance tax threshold of £325,000, then your estate will pay tax at 40% on the amount which is above the threshold when you die. If you leave at least 10% of your estate to charity, the rate is reduced to 36%.
Why do we have to pay it?
The idea of inheritance tax is that it reduces the continuance of inherited wealth. Inheritance tax helps to redistribute income so at least some of the money that may be inherited goes to the state and is distributed to the nation. With the rocketing house prices of recent years, more people than ever are now going above the inheritance tax threshold.
Are there exemptions?
Any assets left to a spouse or registered civil partner, assuming they are a UK citizen, are exempt from inheritance tax. Your partner's inheritance tax allowance is also increased by the amount you didn't leave to others. A couple can currently leave £650,000 tax-free. So for example, if a couple have assets worth £800,000 between them and the husband dies first, leaving £200,000 to their children, the remaining £125,000 of his non-taxable estate passes on to his wife, leaving her an allowance of £450,000.
Financial advice
As with anything in the world of tax, it's best to get expert financial advice if you have any questions. If you need advice on inheritance tax, find out more at the Co-Operative Legal Services website.
How can I reduce my tax bill?
Money given away before you die is still counted as part of your estate in most cases, and still subject to inheritance tax if you die within seven years of you gifting it to someone. Hence it's a good idea to plan how you're going to pass on your assets as soon as possible. However, even if you die within seven years, there are a range of exemptions which can help you reduce the final tax bill:
Annual inheritance tax gift exemption: The first £3,000 given away each tax year is not subject to inheritance tax if you die.
Gifts to political parties and charities are inheritance tax-free.
Give £250 each year to everyone you know: These will be excluded from inheritance tax.
Gifts from income: If you have an income from a pension or earnings which isn't enough to affect your lifestyle, then it is exempt from inheritance tax.
Farms: If you own an agricultural property that's part of a working farm, then a percentage may be exempt.
Inheritance tax planning is very important so don't ignore it. Get advice on it today so make sure you've made the necessary arrangements for the future.