How does inheritance tax work? One of the more complex areas of taxation, it can be difficult to navigate without the help of an expert. There are, however, a few key points that you should be aware of either when preparing a will or when the time comes for dealing with probate issues. To offer some insight into what these are our focus this month is on an overview of inheritance tax.
What is inheritance tax?
It is a tax that is levied on any element of an estate that is left behind by someone after they have passed away. This could be property, business assets, money, or possessions – such as jewellery, art, a vehicle, etc.
When do I have to pay inheritance tax?
Broadly speaking there are four points to bear in mind regarding inheritance tax thresholds:
- It is applicable to anything above a value of £325,000.
- If you are giving away a home to your children or grandchildren, this threshold is increased to £425,000. Children include those which are biological, adopted, foster, or stepchildren. Keep in mind though that a will must be in place – see last month’s article regarding the rules of dying intestate for full details.
- No inheritance tax is levied if you leave your full estate to a civil partner or spouse, or to a charity or amateur community sports club.
- If you pass before your spouse or civil partner and the value of your estate is below the £325,000 threshold, any unused portion of this can be added to your partner’s, raising the total threshold value to a maximum of £850,000.
What is the inheritance tax rate?
The standard rate is 40%. This will apply to the portion of your estate above the applicable threshold as set out above. A reduced rate of 36% will apply on certain assets if your will states that you wish to leave more than 10% of the net value of your estate to a nominated charity.
Are there any exemptions?
Yes, there are certain reliefs and exemptions that may apply. Again, broadly speaking they include the following:
- If your estate includes any area of woodland or farm then you may be eligible for Agricultural Relief.
- Certain assets, such as ownership of a business – either in full or in part – may be eligible for Business Relief. This could be 50% or even 100% on certain assets, but they must have been passed on either as part of a will or while the owner is still alive.
- Certain gifts are fully exempted – such as those between spouses and civil partners while both are alive and which are not liable to tax after one partner has passed. Others may be classed as part of your estate, even if they are gifted in the seven years before your passing. The amount of tax may be less than 40% (known as tapered relief) and will apply to anything valued above the £325,000 threshold.
For more personalised advice or for help preparing a will our IWC Probate Services team is available to advise and help. For an appointment or an informal discussion reach out to us by phone on 020 8017 1029 or by email at firstname.lastname@example.org.