What is Inheritance Tax?
When someone dies, whether they have a Will or not, all their money and possessions – known as their estate – is valued.
If the value of the estate, once the debts and liabilities have been deducted, is less than the nil rate band then there will be no Inheritance Tax to be paid. The nil rate band is currently £325,000.00.
If the estate is valued at more than this, Inheritance Tax is calculated at 40% on everything over the £325,000.00.
My assets are worth more than the nil rate band!
What can I do about this now?
Did you know there are Inheritance Tax exemptions which can be used whilst you are still alive?
You are permitted to give away up to £3,000.00 per year under your annual allowance, £250.00 annually to as many people as you like under the small gift allowance, and £5,000.00 to your children on their marriage under the wedding gift allowance.
It is also possible to gain exemption for ‘making gifts out of income’. Very detailed records must be kept if you want your Executors to be able to claim this exemption. We can talk you through this.
It is possible to make larger financial gifts in your lifetime. However, if you die within 7 years of making a larger gift, it will be taken into consideration when your Inheritance Tax is calculated.
What can I do about this in my Will?
We can advise you on making your estate as tax efficient as possible. Our team at Buckingham Wills & Probate will explain the various ways to manage your money and possessions so as to ensure it is tax efficient when the time comes.
It may be that you use the spousal exemption, leaving your estate to your spouse and, in the process, leaving them your Inheritance Tax nil rate band to use when their estate is distributed. You may choose to leave your main residence to a direct descendant, taking advantage of the main residence nil rate band.
There are further exemptions and types of tax relief available, including business property relief, preserving access to income from a gift into trust, and using trusts to protect funds from tax liability.
Crucially, gifts to charity are not subject to Inheritance Tax. Many people choose to leave considerable legacies in their Will so that they can make a difference for others. These gifts have the added benefit of reducing the overall value of the estate for tax purposes. If you leave over 10% of your estate to charity, the Inheritance Tax on the remaining taxable estate will be calculated at a rate of 36% rather than 40%.
I know there will be an Inheritance Tax liability, and I don’t want my family to pay. What can I do?
You could take out a life insurance policy for the purposes of paying the Inheritance Tax. The policy pays out on death, into trust, and is available for use against the tax bill straight away.