What do you need to know about Inheritance Tax?

Are you thinking about the tax implications of your estate and what this could mean for your loved ones after you pass?

Are you thinking about the tax implications of your estate and what this could mean for your loved ones after you pass?

If you have a high value estate, this could impact your beneficiaries significantly as they may not be able to inherit the wealth you had intended them to in your Will.

What is Inheritance Tax?

Inheritance Tax (IHT) applies to the estate of someone who has died when at least part of the estate exceeds the current tax-free threshold, once reliefs and allowances are taken into account.

It is important to understand how your estate may be taxed and how this may affect your beneficiaries. There are many ways to plan for this and mitigate the costs.

How much is it and do you have to pay?

Currently, the nil-rate band is set at £325,000, meaning there is no tax to pay if your estate has a value below this amount.

On top of this initial threshold, there are a range of reliefs and allowances.

If you give away your home to a direct descendant which means your threshold can increase to £500,000 under the Residence Nil-Rate Band (RNRB).

Also, if you are married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die.

This may mean you can pass on up to £1 million tax-free.

Giving gifts of up to £3,000 will be tax-free under annual exemptions. If you give £3,000 or more in a year, these could be subject to various rules meaning they would count towards the value of your estate and you may be charged IHT, depending on how and when the gift was made.

There are many other reliefs and allowances that may allow you to reduce your IHT liability further, including trusts, Business Property Relief and Agricultural Property Relief.

If you are not eligible for these, you will need to pay IHT which is only charged on the part of your estate that is above the threshold.

Any assets above these thresholds and reliefs could be subject to IHT at a rate of 40 per cent.

If 10 per cent or more of the estate passes to charity, a reduced rate of 36 per cent will apply to the entire estate above the tax threshold instead of the standard IHT rate of 40 per cent.

To determine whether a charitable gift qualifies the estate for the lower rate of IHT, a figure known as the baseline is used.

This figure is the value of an estate after the nil-rate band and any other exemptions and reliefs have been deducted, but before the gift to charity has been made.

We can offer expert guidance on IHT and how to maximise your estate for your loved ones, contact us for advice.

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