Financial Mortgage Advice

Will you leave an inheritance tax bill?

Inheritance Tax

To understand if you’ll leave an inheritance tax (IHT) bill you need to look at a few things. Read this short article to find out what you should be looking at.

Inheritance tax (IHT) will be applied when you die, if your estate is valued over a certain amount.  Your estate includes things like your money, property, investments and belongings.  If you are UK domiciled (a tax status related to residency) it is due on all of your worldwide assets (although there is protection from double taxation treaties with some countries).  You will usually only pay inheritance tax on your UK assets (as the country you live in will have its own rules).

After you die, your representatives will need to calculate the value of all of your assets and deduct any liabilities (debts). The remainder is called your “estate”, and this value is what may be liable to inheritance tax (IHT).

Depending on the arrangements you make, inheritance tax could take a sizeable chunk out of your estate, leaving less for your loved ones. But it’s possible to reduce the amount owed – and even pay no inheritance tax at all.

Questions about Inheritance Tax?

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The First Step - Figuring Out the Size of Your Estate

It can be surprising what is included in your estate for inheritance tax purposes and what’s not. For example, did you know that any gifts to your loved ones you’ve made in the last seven years could be included, but the value of your pension might not be? So, to start you should add up the value of your property, savings, investments and other assets e.g. cars. Also, if you’re entitled to income from a trust or live in a property held in trust, the value of the trust fund may also need to be added. Then imagine you turned your house upside
down. Anything that falls out should be included. So, your TVs, laptops, furniture, antiques, jewellery any valuable collections. You can see how quickly it would all add up. But does that mean inheritance tax would apply to all of it? Please read on to find out more.

Allowances That you Need to be Aware of

The good news is you won’t pay inheritance tax on the full value of your estate. There are tax-free allowances before inheritance tax applies. The first tax-free allowance to be aware of is £325,000. You may have heard it being called the nil-rate band, but let’s call it a tax-free allowance just now to keep things simple.  This means you’ll only be liable for tax on the value of your estate over the £325,000 allowance. There’s another big allowance, but it has some rules around it. The tax-free property allowance of £175,000 – or residence nil-rate band to give it its technical name – applies if you leave your home to your children or grandchildren. So, if you add the two allowances together (£325,000 and £175,000), you can potentially leave £500,000 tax-free, as long as you leave your home to your children or grandchildren.  Inheritance tax allowances should ideally be looked at alongside other tax allowances and reliefs that are available as art of a wider Financial planning process.

You can double your allowances to leave even more tax-free

Did you know if you’re married or in a civil partnership you can leave everything to your partner completely free from inheritance tax? However, this doesn’t mean you can ignore inheritance tax. For example, if you die first, everything would pass to your partner tax-free. But when they die, there could be inheritance tax due. The good news is your partner can use your unused allowances. So, if you leave everything to them they can use your tax-free allowances of up to £500,000 plus their own £500,000. This means they can potentially leave £1 million tax-free.

Inheritance Tax – a snapshot

Some important figures to keep in mind:
• £325,000 is your tax-free allowance
• £175,000 is your tax-free property allowance
• 40% tax applies above the tax-free allowances
£209,000 was the average IHT bill in 2018/19

What to do next? We know it’s easy to keep putting things off, but getting your affairs in order doesn’t have to be difficult. Contact your adviser to get started

Plan now for your future

If you want to save your loved ones from having an unnecessary tax bill it’s important to plan ahead. The allowances mentioned in this article are just the start of inheritance tax planning. There are many other ways to reduce or prevent an inheritance tax bill through effective financial planning.

Please get in touch with an Independent Financial Planner if you have any further questions on Inheritance Tax or anything else.

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