It’s a common misconception that inheritance tax only affects the extremely wealthy. However, if you’ve been looking into inheritance tax you may have read about a threshold of £325,000 before tax applies. Anything you own above that value could be subject to 40% tax.
To understand how this relates to you and whether you’re going to be liable for inheritance tax, you’ll want to look at a few things. The following information is based on our current understanding of taxation law and practice in the UK which may change. The amount of tax you pay and the relief you receive depends on your own personal circumstances which may also change in the future.
Figuring out the size of your estate is the first step
To judge whether inheritance tax is due, the first thing to do is calculate the value of everything you own.
We don’t often tot up the value of everything we own and it’s maybe why people often get caught out with inheritance tax. In fact, according to HMRC statistics, the average bill was a massive £197,000 in 2017/18. So, it’s really important to do this now.
It can also be surprising what is included in your estate for inheritance tax purposes and what’s not. For example, did you know that any gifts to your loved ones you’ve made in the last seven years could be included? Whereas the value of your pension might not be.
To start you should add up the value of your property, savings, investments and cars. Then, imagine you turned your house upside down. Anything that falls out should be included, like your TVs, laptops, furniture, antiques, jewellery and any valuable collections. You can see how quickly it would all add up. But does that mean inheritance tax would apply to all of it?
There are allowances that you need to be aware of
That threshold of £325,000 is an important figure because it’s a tax-free allowance that everyone is entitled to, no matter what your circumstances are or who you plan to leave your money to. You may have heard it being called the nil-rate band (NRB) but let’s call it a tax-free allowance just now to keep things simple.
There’s another big allowance, but it has some rules around it. The tax-free property allowance of £175,000 – or residence nil-rate band (RNRB) to give it its technical name – applies if you leave your home to your children or grandchildren.
So, if you add the two allowances together (£325,000 and £175,000) you can potentially leave £500,000 tax-free. As long as you leave your home to your children or grandchildren. The property allowance does reduce if your estate is worth a certain amount, but we won’t go into too much detail just now.
You can double your allowances to leave even more tax-free
Did you know if you’re married or in a civil partnership you could leave everything to your partner completely free from inheritance tax? However, this doesn’t mean you can ignore inheritance tax.
For example, if you die first, everything will pass to your partner tax-free. But when they die, there could be inheritance tax due.
The good news is your partner can use your unused allowances. So, if you leave everything to them, they can use your tax-free allowances of up to £500,000 plus their own £500,000. This means they could potentially leave £1m tax-free to children or grandchildren.
What if I do have an inheritance tax bill?
Inheritance tax is sometimes referred to as a voluntary tax. This is because there are many planning opportunities to reduce or prevent it.
Of course, with tax it’s never simple. There are a lot of complicated rules about inheritance tax. And there are a lot of potential pitfalls that could cost your loved ones a fortune.
Personal circumstances differ and not all of this information is applicable to every client and/or their business, this information is general in nature and should not be relied upon without seeking specific professional financial advice.
The Financial Conduct Authority (FCA) does not regulate tax advice, estate planning, trusts or will writing.
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Thresholds, percentage rates and tax legislation may change in subsequent finance acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future results.
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