Inheritance Tax is paid upon death if your estate exceeds the tax allowances and exemptions. It is based on the value of your estate once any debts have been taken off and the current rate of Inheritance Tax is 40%. It is paid by the person that has died and must be paid before Probate is issued.
There are a number of exemptions and allowances available that can reduce the amount of tax.
What is Inheritance Tax?
Inheritance Tax is a tax on the value of your estate once any debts have been taken off. It is paid by the person that has died and must be paid before probate is issued. There are a number of allowances and exemptions that can reduce the amount of tax paid.
Each person has an Inheritance Tax allowance known as the Nil Rate Band which is currently £325,000. In addition, each person that meets the qualification criteria has an extra allowance called Residence Nil Rate Band. This is worth £150,000 in 2019/20 and will increase to £175,000 on 6 April 2020. This means each person potentially has £500,000 free of Inheritance Tax before applying any other exemptions. A surviving spouse or civil partner can claim the unused Nil Rate Band of their deceased spouse or civil partner which means they can potentially have £1,000,000 before tax is due.
How will tax planning help?
Planning for Inheritance Tax can ensure that you receive all of the available tax allowances and exemptions. Planning early enough can save a significant amount of tax.
What happens if I do not plan for Inheritance Tax?
Certain allowances such as the Residence Nil Rate Band have a qualification criteria that must be met before it can be claimed. Other allowances such as business property relief can very easily be lost if careful attention is not paid to it.
Usually, you must survive for seven years after making a gift. However, in some circumstances the period can be as long as fourteen years.
What should I consider:
Value of your estate
The value of your estate may mean you do not qualify for certain allowances. It is essential to keep a record of the current value of your estate to ensure you do not accidentally exceed the allowances without reviewing your tax planning.
Your marital status
Unmarried partners do not qualify for spouse exemption from Inheritance Tax which means you can miss out on a significant tax saving.
Usually, if you die within seven years of making a gift, the value is added back into your estate. If tax becomes due on that gift, you may be able to reduce the amount of tax paid if you die between three and seven years of making the gift. After seven years, the gift will become free of Inheritance Tax. However, they are exceptions to this.
If you have a significant income, you can consider making gifts out of excess income. Provided you meet the criteria the seven year survivorship period does not apply.
Your will can be used to qualify for tax allowances and exemptions. It is important to ensure your will is up to date because it can also prevent you qualifying for certain allowances such as the Residence Nil Rate Band.