What is inheritance tax (IHT)?
Inheritance tax is a 40% tax applied after a person dies to estates that are worth over £325,000.00 – or more if a home or the sale proceeds of a home are included.
However, you only get your full 325,000 if you haven’t made any gifts in the seven years before your death.
If you pass your estate to your spouse, it is exempt. You can inherit your predeceasing spouses’ 325.000 if not used and apply this so 650k can pass before it is chargeable.
You get an additional 175.000 if your estate passes to lineal descendants and includes a property.
What’s included in the estate?
The value of your estate for the purpose of inheritance tax includes:
- your savings
- possessions including property
- pension funds (certain payments from payment funds may be subject to Inheritance Tax)
- subject to certain exemptions, the value of any money or property you gave away during the seven years prior to death
The first £325,000 of your estate is tax-free so the 40% tax only applies to anything that goes over this value.
How to plan for inheritance tax?
Deciding how to manage your inheritance tax bill is completely up to you. Here are some ways you can plan for it:
- Make charitable donations: Charitable donations made during your lifetime or through your will can reduce your taxable estate. Consider leaving a portion of your assets to a charitable organization you support.
- Gift assets during your lifetime: One way to reduce the amount of inheritance tax your beneficiaries may have to pay is to give assets away during your lifetime. Under the current law, you can give up to a certain amount each year to an individual. By gifting assets while you’re still alive, you can reduce the size of your estate and potentially lower the tax bill for your heirs.
- Creating a will – This can help reduce inheritance tax by allowing you to plan how your assets will be distributed after your death. Ensure that your estate is distributed according to your wishes: If you do not have a will, your estate will be distributed according to the laws of your state or country. This may not be in line with your wishes and may result in a higher inheritance tax bill.
Inheritance tax can be an emotional subject, but there is support available.
For more information, have a conversation with our expert solicitor Lara Thomas on firstname.lastname@example.org or 01753 486777 to understand the steps to deal with it effectively.