Inheritance tax is a tax on the ‘estate’ of someone who’s passed away. Many people in the UK will never need to worry about Inheritance tax (IHT) as the total estate is often below the threshold at which IHT is payable. However, for many, the record house prices in the UK particularly in the Southeast, have meant that threshold allowances can be easily exceeded. This can cost loved ones hundreds of thousands when you die. Much IHT can be avoided and can be avoided legally using the rules that have been set by HMRC. Worth noting that HMRC set the rules and they do expect people to take advantage of the rules and apply IHT planning to reduce the bill. But you cannot reduce the bill unless you plan well in advance. So, we will take you through some important key points and guide you through the basics. These points are not exhaustive but will provide sufficient understanding for a basic guide.
HOW IS IHT CALCULATED
How much you pay depends on the value of the deceased’s estate. The estate is worked out by taking the value of all the assets less any debts. There will never be any IHT to pay if the value of the estate is less than £325,000 or you leave everything over to your spouse or civil partner. If this does not apply your estate will be taxed at 40% on anything above the £325,000 threshold when you die. Worth noting that assets left to your spouse or registered civil partner, provided they’re living in the UK, are exempt from inheritance tax.
THE 7 YEAR RULE/LIFETIME GIFTS
Money given away before you die is still usually counted as part of your estate unless you live for a further seven years or more after making the gift. So, you can gift much of your estate without IHT being paid provided you live longer than 7 years after the gift was made. If you die before 7 years the people you gave gifts to will be charged IHT on a sliding scale. Therefore, early planning of how to pass on your assets is essential.
INHERITING YOUR PARENT’S HOME
Parent’s homes left to direct descendants such as your children receive an additional £175,000 referred to as the “residence nil-rate tax band. You receive this on top of the £325,000 which increases the tax-free threshold to £500,000. On top of this, if you leave your estate to your partner your partner’s inheritance tax allowance rises to £1 Million. The £175,000 main residence allowance only applies if your estate is worth less than £2 million. On estates worth £2 million or more, the main residence allowance will decrease by £1 for every £2 above £2 million that the deceased’s estate is worth.
GIFTS NOT SUBJECT TO TAX/IHT
- You can gift £3,000 each tax year IHT tax-free.
- Wedding gifts are tax-free. £5,000 for a gift from a parent, £2,500 from a grandparent or £1,000 from anyone else.
- Gifts to charities and political parties are IHT free.
- Gifts of up to £250 per person each tax year are excluded from inheritance tax and are not counted towards the £3,000 annual gift exemption.
NON-MARRIED COUPLES
As stated above when you are married or in a civil partnership assets left to your spouse or registered civil partner, provided they’re living in the UK, are exempt from inheritance tax. This is not the case for unmarried couples and the IHT status is more complicated particularly for property.
If you’re not married, but own assets and property jointly with another person you need to be aware of the HMRC rules and plan accordingly. Whether or not you have to pay inheritance tax will depend on whether you and your partner own the property as ‘joint tenants’ or ‘tenants in common’, and whether there’s a will. The following points should be noted:
- If you’re joint tenants i.e., you both own all the property and your partner has left you everything in the Will you will be taxed at 40% on anything above the £325,000 threshold.
- If you’re joint tenants without a Will the “right of survivorship” means that the property would still go entirely to you. However, your partner’s family would still have a claim to his or her share of other assets such as insurance policies and pension investments.
- For tenants in common i.e., you each own a percentage of the property the IHT status depends on whether a will was made or not. If your partner’s made a will leaving their share to you, any inheritance tax would be paid out of the estate by the executor before the settlements or bequests are shared out. You may end up having to pay inheritance tax on the property if it exceeds the allowable threshold.
- If your partner did not make a will leaving their share to you, and you are tenants in common, his/her share will go to their next of kin. As an unmarried partner, you would only be entitled to the share of the property you currently own.
- So, it is especially important that if you own a property with someone who isn’t your husband or wife you need to make a will describing exactly who benefits on your death.
- From an IHT standpoint it may also be worth considering a marriage or civil partnership.
GETTING FINANCIAL ADVICE
Before spending money on accountants and Lawyers to look at what the estate is worth. Do a few sums and if you are under the threshold then you do not need any financial advice. If the estate is in the millions then it would be worth seeing an accountant or lawyer.
Roger GUNNING FCMA CGMA
Hammersmith Office