Inheritance Tax is a complex issue and is one that people don’t consider either when making a will. Moreover, when people are coming to terms with a bereavement, the last thing people want to concern themselves with is a complicated tax system. Often people dealing with inheritance are grieving, and it’s only later that they realise that Inheritance Tax has taken a huge chunk of the will.
So, what is Inheritance Tax and is there any way to avoid such a hefty tax bill?
Inheritance Tax explained
Inheritance Tax is essentially a payment to the government after the death of a person in the UK. It is a fee based on the value of the deceased person’s estate. The tax is based not only on the money they owned but their whole estate including possession and property.
There is a threshold for Inheritance Tax which is £325,000. This means that if your estate is worth more than £325,000, the tax will be charged at 40% on all of the amount which is above the threshold.
The tax is dealt with and paid by the person dealing with the affairs of the estate, known as the executor of the will. The tax bill is paid from the estate, not from the people who inherit the items in the will. However, the beneficiaries of the will may have to pay tax related to the items they receive, such as a rental income if they receive property in the will.
When you don’t have to pay Inheritance Tax
There are some instances when you don’t have to pay Inheritance Tax which include;
- If you leave everything in your will to your spouse of civil partner
- If you leave your estate to a charity or community amateur sports club
- If your estate is worth less than £325,000.
How to pay less Inheritance Tax
There are a few ways in which you can reduce your Inheritance Tax bill, giving more of your estate to your chosen beneficiaries, rather than the government.
1. You can increase the threshold from £325,000 by £100,000 to give you a threshold limit of £425,000 providing that you leave your home to your children or grandchildren.
2. You can pay a reduced tax rate of 36% instead of 40% providing that you leave 10% of your net value of the estate to a charity in you will.
3. You can claim business relief on property, shares and machinery for a business to pay less inheritance tax based on the business assets in an estate.
4. For married couples, any unused amount in the threshold of £425,000 can be added to your partner’s threshold so their threshold could potentially be much higher at £850,000.
5. You can give away parts of your estate as gifts when you are alive which may reduce the tax you have to pay.
Confused about Inheritance Tax?
If you want to ensure as much of your estate goes to your loved ones as possible, our team of experts can help you to become more tax efficient and help your beneficiaries receive a better entitlement. For impartial advice call the team at Probate London on 020 8017 1029.