Many people spend their lives evading tax, finding every conceivable loop hole or hidey hole to get away from paying “Caesar’s things to Caesar”.
Inheritance tax is one of those dreaded and despised types of tax. Like someone having hacked a great big chunk out of your wedding cake before you get to cut it.
It can feel unfair. After all, you have paid tax on this money already. Why should you pay again?
Let’s say you’re getting on in years and have saved up a handsome sum of money. With the rise in rent and property prices, you plan to gift this to your grandchildren to give them a little headstart on life.
Will this be taxed?
Well, let’s first answer the question – What is inheritance tax?
What is inheritance tax?
Inheritance tax is a tax on the estate of someone who has died. The estate is all property, belongings and money.
When is inheritance tax not payable?
Inheritance tax is not payable if:
- The value of the estate is below the nil rate band threshold of £325,000
- Everything above that amount is left to a spouse/civil partner/charity/community club
If the value of the estate is more than £325,000 the amount over that could be taxed at the rate of 40%.
However, this can be reduced to 36% if you donate 10% of the estate to charity.
When it comes to passing on your home, the tax differs depending on who you give it to.
- If you leave it to your spouse or civil partner when you die, no inheritance tax is payable
- If left to someone else in your will it will count towards the value of the estate
- If left to your children or grandchildren, that nil rate band increases to £500,000. This includes stepchildren, adopted and foster children but not nieces, nephews or siblings
While you are still alive and kicking you can also take advantage of the tax free amount of £3,000 you are allowed to gift per tax year. You are also permitted to carry this over once if you don’t gift one year.
There is also an amount of £250 you can gift to those that have not been beneficiaries of the annual gift allowance. This amount can be gifted an unlimited amount of times so even though it’s a small amount you could whittle away at things pretty quickly this way.
If the wedding bells are ringing for family or friends, this is also an opportunity to gift away those savings. This can be up to £5,000 for children, £2,500 for grandchildren and £1,000 for anyone else.
However, if you die within seven years of making any of these gifts they will be added to your estate. And if the estate then exceeds the nil band rate amount then you may be liable for inheritance tax.
There is such a thing called taper relief though, which means that the percentage of tax charged reduces the longer you survive into that seven year period.
For more detailed information on this and other tips to make sure your assets are put to the best use possible, you will find the links at the end of this article helpful.