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Inheritance Tax and Estate Planning

Inheritance Tax

What is inheritance tax?

Inheritance tax is charged by the government on a person’s assets (their estate) when they die.

 

How much of your assets will be taxed?

Everything above the first £320,000 will be liable to inheritance tax.  This value is known as the nil-rate band as no tax is charged on it.

In 2015 the government added a new additional nil-rate band applicable when a residential property is passed to a ‘direct descendant’ and is currently £100,000.

 

At what rate is it charged?

Inheritance Tax

Any value that is liable to inheritance tax is taxed at the rate of 40%.  This means that two fifths of your assets above this value are given directly to the government.

 

What happens with joint assets or estates passed between spouses?

For those that are married, or in a civil partnership recognised by the government, they can pass assets between each other free of all inheritance tax and can pass on any unused nil-rate band to the remaining partner to add to their full allowance, allowing them to pass on more than their full nil-rate band before inheritance tax is applied.

 

What if assets have been ‘gifted’ to another?

If assets have been given to someone more than 7 years ago, the government deems that these are entirely the property of the receiver.  If an asset has been gifted within the last 7 years, the government treat the asset as either still owned by the gift giver or partly owned by each party.

For the first 3 years assets will be treated entirely as hte property of the gift giver.

For the following years up to a complete 7 years, the assets will pass in ownership at the rate of 20% per annum, as follows:

 

Time since gift made

% of gift in estate % of gift owned by reciever

Less than 3 years

100%

0%

3 to 4 years

80%

20%

4 to 5 years

60%

40%

5 to 6 years

40%

60%

6 to 7 years 20%

80%

Over 7 years 0%

100%

 

How does this change for those with larger estates?

If a person has accumulated assets with a value of over £2 million, for every £1 over this, £1 of the nil-rate band will be withdrawn.  in other words, based on current allowances and rules, the nil rate band will be entirely withdrawn on estates valued at £2,650,000 or higher.  This would mean that on estates over this value 40% inheritance tax would be payable on the entire estate.

Inheritance Tax

What should you do?

It is important to plan for the future and ensure that your assets, whether physical or financial can be passed onto the people you intend.  By making a plan and considering your options, you can ensure that you don’t get caught out and pay a higher tax bill than necessary.  Contact us now to discuss your options.

 

For the most up-to-date rules please visit www.gov.uk/topic/personal-tax/inheritance-tax