Last month, financial journalist Martin Lewis reported on inheritance tax and some common “misunderstandings” around the rules. Here’s our take on the “myth-buster” video he recently shared and our guide to help you with your inheritance tax planning.
Inheritance tax rules
Here are our thoughts on the five key rules shared by Martin Lewis on inheritance tax (IHT):
- Inheritance tax exemptions for spouse or partner
When it comes to your estate, anything left to your spouse or partner is exempt from inheritance tax. So, it doesn’t matter if your estate is valued above the threshold (see next point), a husband, wife or civil partner won’t have to pay this tax. Make sure you have a legally binding Will to ensure your wishes are clear, and you leave what you choose to the right people. - Inheritance tax applies to others above £325,000
You can leave up to £325,000 in your estate to others without incurring inheritance tax (IHT). This includes property, vehicles, bank accounts, investments and insurance policies. In the absence of a spouse or civil partner, anything above this amount will be liable for IHT. However, there will be no IHT liability on anything you choose to leave above the threshold to an amateur community sports club or charity. - £500,000 allowance for leaving home to descendants
Along with the above £325,000 allowance, there is also another allowance called the ‘residence nil-rate band’ of £175,000. When combined, this provides a £500,000 allowance if you leave your home to a direct descendant. Children and grandchildren, along with adopted, foster and stepchildren are covered by this allowance. There are a few exclusions, including if your estate is more than £2 million – speak to our team. - Unused inheritance tax allowances go to spouse or civil partner
A little known inheritance tax (IHT) rule is the fact that any unused allowances are passed onto the spouse or civil partner. Also, the surviving spouse’s inheritance tax allowance will increase in relation to the percentage of the allowance that wasn’t used. So, for example, an estate worth £1 million might not incur IHT – each person’s combined allowance of £500,000 could cover the estate value. - Gifting can help to reduce inheritance tax
There are a few ways to reduce the amount of inheritance tax needing to be paid and this includes gifting. You can give financial gifts up to £250 each year to people, and any amount given to charity is tax free. You can also give larger amounts without tax having to be paid if the person giving the gift lives for 7 years or longer. For more information on gifting, please read our previous article, Giving tax-efficient gifts…
Inheritance tax planning, Nottingham and Lincoln
When it comes to gifting, it’s worth noting there’s a tapered scale in place for inheritance tax (IHT). If someone leaves a gift and dies within 3 to 4 years, IHT is charged at 32%. This reduces to 24% if someone dies within 4 to 5 years, 16% within 5 to 6 years, and 8% within 6 to 7 years. After 7 years, no IHT will need to be paid. The £325,000 allowance can also be applied to gifts, which could reduce the amount of tax liable.
Along with gifting, there are other ways to plan your estate that could help to reduce inheritance tax (IHT). Our financial planning team will help you calculate the total value of your estate, including your property, money and possessions. When someone dies, any debts are subtracted from the estate value and inheritance tax thresholds are then applied.
At the time of writing, the government is considering abolishing inheritance tax (IHT). Currently, anything above the IHT threshold is taxed at 40% on your death. If you choose to leave at least 10% of your estate to a charity in your Will, this reduces to 36% (after deductions). It’s worth getting your estate valued and putting plans in place to reduce IHT.
If you need advice on inheritance tax rules and the impact on your estate, get in touch to speak to our financial planners.
Sources:
https://www.express.co.uk/finance/personalfinance/1853333/Martin-Lewis-inheritance-tax-allowances
https://www.moneysavingexpert.com/family/inheritance-tax-planning-iht/
https://www.gov.uk/inheritance-tax/gifts
