When is Inheritance Tax payable?
Inheritance Tax is payable when your estate (normally the value of anything you own less anything you owe) exceeds a certain threshold, called the “nil rate band”. This is currently set at £325,000 per person. Married couples and civil partners can transfer their unused nil rate band allowances, which means their joint nil rate band is £650,000.
Anyone who owns a home and leaves their home to their children or grandchildren should also be eligible for the Main Residence Nil Rate band, which was introduced on 06/04/2017. This is set at £100,000 per person for the 2017-18 tax year. You can read more about this new nil rate band here: Upcoming changes to Inheritance Tax rules
If your estate exceeds the nil rate band available, your estate may pay Inheritance Tax of 40% on the excess. For example, if you are single, do not own your own home and your net estate is worth £350,000, your estate may pay Inheritance Tax of £10,000 after your death (which is 40% of £350,000 – £325,000).
In some cases your estate may also include gifts you have made to other people before your death. The tax treatment of these gifts can vary depending on the amount and the type of gift, so it is important to keep accurate records in case they are required after your death.
Will you be affected?
Inheritance Tax is normally seen as something which only affects very wealthy people. However, this is no longer the case, mainly because asset values have increased over the years without the Government significantly increasing the nil rate band or other allowances. For example, the current nil rate band of £325,000 was set in 2009 and was not increased until 2017-18 with the introduction of the Main Residence Nil Rate Band (which is not available for everyone).
You should carefully consider your own assets and liabilities, both now and in the future, to see if you may be liable. Some commonly overlooked areas are:
- How much is your house worth now and what could it be worth in the future?
- Are your debts reducing each month? For example, if you have a repayment mortgage it means the value of your estate is increasing each month
- Are any life insurance benefits written under Trust? If not they may be paid into your estate
- Will you receive a lump sum in the future? This could be from a pension, a redundancy payment or an inheritance
How to minimise Inheritance Tax
There are four important guidelines when considering Inheritance Tax planning:
- First, ensure you and your family are protected before you consider leaving assets behind for future generations. It is more important to maximise your own wealth before you try to minimise Inheritance Tax
- Second, make sure your assets will actually be liable for Inheritance Tax before you make any plans. For example, most pensions are not included in your estate for Inheritance Tax purposes
- Third, take independent legal and financial advice before signing your assets away. Although this may seem straightforward it is often irreversible even if you change your mind in the future
- Fourth, and very importantly, ensure you have a valid, updated Will in place and make sure someone knows where you have stored it
The most common ways to reduce your Inheritance Tax liability are to either give your assets away (either to another person or to a Trust) or to leave some of your estate to a charity after your death. There are other less common options available, including buying certain assets during your lifetime (such as a woodland or a business).
Whenever you make a gift you should ensure you keep an accurate record, including the name of the recipient, the date of the gift and the type of gift (for example, did you write a cheque or did you give them some shares?). This will make it much easier for your estate to be administered after your death and it could help to mitigate Inheritance Tax.
Find out more
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Please note: the information provided on this page is only for people who are resident, ordinarily resident and domiciled in the UK. Very different rules apply to anyone who does not meet these criteria.