Recent studies by the financial services sector have shown that in the past year, there was a 38 percent increase in demand for advice on inheritance tax planning. A combination of mortality concerns during the pandemic, and worries over ever-rising property prices, have left many to wonder what that means for their inheritance tax and how much they will have to pay. This article gives a brief overview of the basics to current inheritance tax thresholds.
Inheritance tax is calculated on the total of your estate. Your estate is the combined total of all your assets, such as properties, businesses, bank savings, investments, possessions, and anything else of value – including some life insurance policies, which will all be calculated into one sum when you pass away. This is what will be taxed, and what many people are hoping to avoid when seeking advice.
How much could I be taxed?
This can seem a little complicated, but we have laid out some simple rules here.
- £325,000 is classed as the “nil rate band” of your entire estate. This means that if the total of your assets (combined with certain gifts you make in the last seven years before you die) is valued below this number, your executors won’t have to pay inheritance tax from your estate.
- Anything above the threshold is generally taxed at 40% – this means that if your total estate was £325,001 you would only need to pay 40% on the extra £1 of tax on the whole estate, which would be 40p.
This can increase to a large tax bill for higher value estates (For example, if your estate was £400,000 there would be £30,000 tax to pay.)
- Depending on who is inheriting your estate, many individuals can extend this threshold up to £500,000 thanks to the ‘residence nil rate band’ or ‘residence band’ which was introduced at an additional £100,000 in 2017, and then raised to £175,000 in April 2020. This additional allowance is permitted on top of your nil rate band of £325,000 on the condition that you pass on a main residence to your children or grandchildren and the value of the equity in your property is at least £175,000. However, how these additional allowances are calculated can be extremely complicated, so informed, professional advice is strongly advised, and that’s where we can help.
Generally speaking, however, it means that anybody passing on their family home to their direct descendants such as children or grandchildren will have an allowance of £500,000 (which also includes adopted, foster and step-children).
Exceptions and Additional Limits
- Marriage: If your spouse or civil partner inherits your entire estate after you pass away, they are exempt from being charged any tax on this.
- Furthermore, in the future, your spouse will also be able to take advantage of the tax threshold that you didn’t use when passing on your estate, as this will be passed on to them too. This means that when they die, their non-taxable inheritance allowance could be as high as £1million, a combined total of both £500,000 allowances.
- Another important exemption: People who perform particularly risky jobs, such as the armed forces, police, firefighters, paramedics and humanitarian workers can all be exempt from paying inheritance tax depending on the conditions of their passing. If they died as a result of the job, or were injured on the job to an extent that their injuries hastened their death, then they will also pay no inheritance tax.
- Bequests to charity: outright gifts to charities made in your will won’t count towards the total taxable value of your estate. This is called leaving a ‘charitable legacy’. You can also cut the Inheritance Tax rate on the rest of your estate from 40% to 36%, if you leave at least 10% of your ‘net estate’ to a charity.
These are some of the key points to consider when looking into inheritance tax, but there are a variety of different tips and tricks people use to lower their tax bill so that their loved ones have more inheritance to enjoy and keep hard-earned money in the family.
At Hutchinson Thomas, we understand that each individual case will have its own solutions, so would encourage anyone with questions to contact our team today to learn more about how we can support you with any inheritance tax questions you may have.
If you would like more information on inheritance tax, or advice on any issues relating to wills, trusts or probate, contact Louise Williams on 01639 640153 or email firstname.lastname@example.org