Inheritance Tax – What’s the Deal with it?

We all inherit something from our families.

For some it might be that old oak dresser or a recipe book. For others, it might be an odd sense of humour or a glint in the eye.

Many of these things are simply passed along without much thought or control over the matter.

But when it comes to inheriting money, it’s a little more complex. Like with inheritance tax on gifting out of ones estate, for instance.

While there is a tax-free allowance on small monetary gifts, it’s a little different with larger sums of money.

However, although many worry about the inheritance tax that will be imposed on their estates after they pass away, it seems only a very small percentage of estates are billed. According to the HM Revenue and Customs only 1 in 20 estates result in a bill.

How much Inheritance Tax is charged

First off, Inheritance tax is charged at 40 percent of the value of the estate above the ‘nil-rate band’ (NRB) which is a tax-free allowance.

If property is not included in the estate then the NRB is £325,000.

If property is included in the estate which is being inherited by either a child or grandchild, the NRB is £175,000. This is in addition to the £325,000 which means that an amount of £500,000 can be given away tax-free. So anything above that amount will be taxed.

If married or in a civil partnership, the entire estate can be passed on to your partner tax-free, as well as your tax-free allowances. In other words, a couple could give away £1m without being taxed.

One thing to bear in mind though, is that these tax-free benefits begin reducing if your estate is valued at more than £2m. So for every £2 that your estate value exceeds £2m, the £175,000 property allowance decreases by £1.

It’s notable that the NRB is fixed at £325,000 until 2026, however this may increase if you are widowed or a surviving civil partner.

How to Reduce Inheritance Tax

In what ways can you reduce the potential inheritance tax bill?

One way is to leave your home to your spouse or civil partner in your will and no Inheritance tax will be payable.

Or you could donate 10 percent of your estate to a non-profit organisation. This brings the tax rate down from 40 to 36 percent.

Another way is with gift allowances. Each person has a gift allowance of £3,000 per tax year. This can also be carried over once which means you could gift £6,000 in one year.

Then there’s the small gift allowance which allows you to give away unlimited gifts of up to £250 tax-free to a person, as long as they aren’t the same people that are benefiting from your annual gift allowance.

Weddings are also a good opportunity for this type of gifting. To celebrate you can give up to £5,000 to children and £2,500 to grandchildren plus £1,000 to anyone else.

If you plan to gift smaller and even larger amounts over a few years these amounts won’t normally count as part of the estate, as long as you are still living seven years after the gift was made.

Got any Questions?

If you are still wondering about something on this subject that has or hasn’t been mentioned or is unique to your situation, please feel free to get in touch with us.

We’d love to assist you in making the best decision for you and your family.