Inheritance tax may well be the most detested of all taxes – which is not so surprising, given that we’re taxed throughout our lives, only to be effectively taxed once more as our estate is passed on to our loved ones. Unfortunately however, inheritance tax is very often a divide that must be bridged. Here we explain who will need to pay this tax and whether there are ways to avoid it.
Inheritance Tax: An Overview
Let’s first put Inheritance Tax (IHT) into context – in 2013/2014 just 26,000 estates paid IHT, representing 4.5% of the deceased over that year. Despite this relatively small figure, worries remain over the tax. This is not least due to rising property values, as any estate with a value of over £325,000 will be liable for the tax – this includes all of your assets – your savings and your property, and as property prices continues to rise, it seems a surety that more of us will need to pay this tax.
Most hard-hitting about IHT, is that the rate is a staggering 40%, payable by the estate before it reaches the beneficiary (where an estate is passed on to a spouse or civil partner, inheritance tax is not payable).
Inheritance tax is paid following the settling of any liabilities, such as mortgages, general expenses and funeral expenses.
Inheritance Tax Changes: What They Mean For You
A number of changes were put in place as of the summer 2015 budget, this namely included a ‘transferable main residence allowance’, which will increase from the £100,000 being introduced in April 2017, to £175,000 by 2020/21. These changes will then mean that the allowance for each person rises from £325,000 to £500,000 if the property they live in is valued at up to £500k and it is being left to children or grandchildren.
The Big Question: Can You Get Around Inheritance Tax?
You are quite legally allowed to give away money over your lifetime, tax-free, without it contributing to the total of your estate. That said, there are some rules, such as a time period of seven years between a gift and the person’s passing, and a limit of up to £5,000 from each parent for their newly married son or daughter. Generally gifts tend to be categorised into four groups:
- Always tax-free
- Potentially tax-free (known as potentially exempt transfers or PETs)
- Taxable, but no tax due at the time the gift is made.
- Taxable, and tax is paid at the time the gift is made.
In order to effectively take advantage of these allowances, you really need to consult with a qualified legal professional.
If you’re struggling to understand inheritance tax, or any part of the probate process, we’re here. Talk with our team of experts at IWC Probate Services, London – call us on 02080171029 or send our team an email via firstname.lastname@example.org and we’ll be back in touch as possible.