No one knows till when he is alive, especially in this era of a pandemic. Life is short and uncertain; it is advisable to take precautionary measures for your family before leaving this world. That might be the only way to express your love even after your death. Saving your money throughout your life and passing the maximum share to HMRC will probably not be your plan. A person mainly experiences two taxes: one income tax and the other capital gains tax –CGT. But once the person dies, only one tax continues to be the part of the game, which is inheritance tax –IHT.
Inheritance tax- IHT is a tax on your estate. If your estate is worth more than £325,000 when you die, your heirs will have to pay inheritance tax on everything over that amount. When you pass away, your estate is accessed that whether a tax needs to be paid or not. So, it a tax on estate and not on you! On death, you leave potential tax liability to the people you leave behind.
If your estate is more than £325,000, then your heirs will have to pay inheritance tax
If your estate is less than the required amount, certainly your heirs will have to pay nothing. Your estate includes your property, cars, jewelry, savings, or any other assets you pass on. The amount after paying debts and funeral expenses is passed on to the descendants. But the most burning question is how much tax needs to be paid on all your possessions? The rate of inheritance tax is forty percent.
Rate of inheritance tax –IHT is forty percent
If your spouse or civil partner entirely inherits your state, they don’t have to pay any interest up to the £325,000, known as the nil rate band. Nil rate band means the amount beyond which you need to pay tax. This figure is attached to the estate of the person who dies rather than what the people inherit. The nil rate band can be passed on to the surviving spouses or civil partners.
Now they can add this nil rate band to their nil rate band. It means when they die, they can leave an estate which will be worth £625,000 that’s free of inheritance tax.
Nil rate band:
- For single or divorced people is £325,000
- For married, people in a civil partnership or widowed is £625,000
The forty percent kicks in after going beyond the threshold. Suppose you are single, and your threshold is £325,000, and your estate is valued at £405,000. It means you are £80,000 over your threshold amount. You have to pay forty percent on £80,000, which comes out to be £32,000. This £32,000 will go to the HMRC and not to your loved ones.
There is a thing called residence nil rate band which from April is £175,000, which you are passing on your home to direct descendants. You could add that to your threshold. But what if you still thought you might be close to your threshold or potentially over it. What if there was a way that you could minimize your liability and pay a bit less or a lot less.
The good news is there are various ways to reduce inheritance tax. You can give away some of your money and possessions. This will automatically reduce your specific threshold amount, leaving less estate on which tax needs to be paid.
Giving away your money and possessions as gift can reduce your inheritance tax
Like everything, some rules need to be obeyed while going through the procedure. If you give away money and property while you are still alive, you can make gifts of up to £3000 in any tax year, and you don’t have to worry about the inheritance tax. You can give more gifts as tax-free as long as you live for seven years after you have made the gift. If you die within seven years of making the respective gift, HMRC will treat it as a part of your estate.
One thing to be kept in mind is that it should be self-evident what things should be considered gifts. It mainly includes things that have some value, such as money. If you sell an item that might involve selling your house to a child for less than its worth, its value will be reduced. The difference in value will be counted as a gift. So, it’s imperative to keep track of terms and conditions!
Inheritance tax is due on anything above the £325,000 threshold. It usually’ s forty percent, but it can be reduced to thirty-six percent if you give away ten percent into your charity. There are many other methods to avoid inheritance tax, and inheritance tax planning is one of them. Try to watch out for different ways to abolish or perhaps reduce the inheritance tax so that you may leave more money for your descendants.
It is a well-known fact that your grave has no cupboard in it, so you leave everything you had earned throughout your life to your children or spouse. It will be a very foolish act not to keep an eye on the strategies you could adopt during your life through which you could reduce the tax amount and pass on the maximum amount to your loved ones.
It is so important to plan and make an entire strategy on inheritance tax –IHT. The key to inheritance tax planning is organization. Like everything, specific rules must be considered while planning for inheritance tax. The more complex your estate, the more likely you will need a financial advisor such as Legend Financial.
The main thing to remember is not to let things slip out of your hands. Keep a record of everything that has been purchased or given away as a gift. For any help, please speak to the right people and sort everything out to make things fall in their place.