Taxes
When you’re grieving for a loved one, red tape is the last thing you need. Sadly, that’s what the laws and paperwork around Inheritance Tax (IHT) throw up. The forms can be horribly confusing, making it very difficult to figure out what exactly is payable.
With rising property prices, more people than ever are liable for the tax. In 2018, HMRC pocketed £5.2 billion from IHT, an increase of £400 million on 2017’s figures. It’s a number predicted by NFU Mutual to rise to £6.5 billion for the 2018/19 tax year.
What is Inheritance Tax?
Inheritance Tax is a tax on the estate of someone who’s died. It includes their property and possessions. Today, around only one in twenty UK estates is liable to pay Inheritance Tax.
When is Inheritance Tax payable?
Inheritance Tax becomes payable when the value of the deceased’s estate tops £325,000. It’s payable at 40% on anything above this threshold (the ‘nil rate band’).
However, transfers between married couples and civil partners aren’t subject to IHT. So the figure rises to £650,000 for married couples where the first to die leaves their assets to their spouse.
A new ‘residence nil rate band’ allowance is also being gradually introduced. In some circumstances, this can bump up the standard nil rate band.
The residence nil rate band is worth £125,000 and will increase to £175,000 per person by April 2020. That’s provided the estate isn’t worth more than £2m.
You can use this allowance only if direct descendants, such as your children or grandchildren, are inheriting your home. The allowance falls by £1 for each £2 that the estate’s value exceeds £2m. At present, it doesn’t apply to estates worth £2.25m or more.
How can I avoid Inheritance Tax?
When the residence nil rate band rises to £175,000 by 2020/21, couples will be able to bequeath property worth up to £1 million without paying Inheritance Tax.
You can also sidestep Inheritance Tax by gifting sums while you’re still alive. You can gift small amounts of £3000 per year or up to £5000 for a child who’s getting married.
In theory, you can gift however much you like in this way. Note, though, that you have to live for at least seven years after the gifting for your generosity to be fully exempt from Inheritance Tax.
Here’s how to reduce your IHT bill:
- Leave money to charity
- Open up a trust for your heirs
- Bequeath your estate to your partner
- Opt for a pension, not a savings account
- Give away £3,000 a year in gifts
If you want more advice on minimising your IHT bill, Moneywise has prepared a handy guide.
How much Inheritance Tax might I pay?
If the value of the estate is less than £325,000, relax. If it’s more, let’s take a look at what you might pay. (Of course, the good news is, whatever you pay, you won’t know much about it.)
You’ll pay 40% on the value of your estate above the nil rate band. That means that, if your estate is worth £725,000, you’ll be charged tax on £400,000 (£725,000 minus £325,000). So your estate would be subject to £150,000 (40% of £400,000) in IHT.
If your estate is worth £350,000, you’ll pay Inheritance Tax on just the £25,000 above the nil rate band threshold. At 40%, that would be £10,000.
The £325,000 figure is fixed until 2021. However, it can be worth more for widows or civil partners. The law allows couples to transfer unused nil rate band to the survivor.
Doing this can double the nil rate band to £650,000. It’s called transferable nil rate band (TNRB).
How do I value an estate?
If you’re not engaging a solicitor to help with the estate, you’ll need to work out its value yourself.
To do this, you must:
- List every asset and calculate what they’re worth on the date of death
- Deduct all debts and liabilities
Be sure to keep a log of how you worked it out. Where property is involved, for example, you’ll need estate agents’ valuations. Note that HMRC has up to 20 years after Inheritance Tax is paid to check your records.
What do assets include?
- Cash in the bank
- Investments
- Land
- Cars
- Jewellery
- Shares
- Insurance payouts.
You can find a more comprehensive list on Gov.uk.
Remember gifting? You’ll need to list any cash or other assets that the person handed over in the seven years before they died. Include any gifts before this time if the giver continued to benefit from the gift. For example, they ‘donated’ their house but carried on living there. The law calls these ‘gifts with reservations of benefit’.
What about those debts and liabilities?
Debts and liabilities reduce the estate. They will include such things as a mortgage, credit card bills, everyday bills and, of course, funeral expenses.
Don’t get too excited, though. You can’t deduct any costs that arise after death from the estate for IHT purposes. These might include legal fees and probate fees.
