Often referred to begrudgingly as the “death tax”, Inheritance tax (IHT) can be a large and often unexpected bill. There is no IHT to pay for estates valued under £325,000, which is known as the nil rate band. However, with the rapid increase in house prices, many unintended families will be subject to this tax.
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There are methods for reducing an IHT bill. IHT is only charged on the parts of the estate which are above the £325,000 threshold.
If everything above that level is left to charity, a spouse or civil partner, or a community amateur sports club than there will normally be no IHT to pay.
On top of this, if 10 percent or more of the total estate is left to charity, there will be a reduced rate of IHT on the remainder of the assets. Currently the IHT rate is 40 percent, which will therefore be reduced to 36 percent.
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IHT will be one of the last taxes levied on a person (Image: GETTY)
Rising property prices have made this tax applicable for a lot more people (Image: GETTY)
If a home is given away to children (including adopted, fostered or stepchildren) or grandchildren than the threshold can increase to £475,000, this is also known as the residence nil rate band.
“Gifts” can also be utilised before death for IHT purposes.
Gifts can be given to spouses or civil partners and incur no IHT. There are no limits on the amounts of gifts that can be given for this purpose.
However it must be noted that gifts totalling more than £325,000 will be charged with IHT if the gift giver dies in the seven years after it was given.
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Gifts can be an effective tool for IHT purposes but they can be a complex element to understand. The government defines a gift as anything that has value, such as money, property or possessions.
They also detail that a gift can be a loss in value when something’s transferred, for example if a house is sold to the individuals child for less than it’s worth, the difference in value counts as a gift. Advice can be sought for gift giving and the government advises keeping records for:
What has been givenWho it was given towhen it was givenHow much it was worth
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There may also be methods to reduce an IHT bill with clever domicile usages.
The government details that if a person’s permanent home is abroad, IHT is only paid on the individual’s UK assets, examples including UK based bank accounts or property.
HMRC treats people as being domiciled within the UK if they either had lived in the UK for 15 or the previous 20 years, or had a permanent home in the UK at any time over the last three years.
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Certain foreign assets will also be excluded from UK IHT. This includes foreign currency accounts with a bank or post office, overseas pensions or holdings in authorised unit trusts and open-ended investment companies. For anyone unsure of what assets will be excluded an Inheritance Tax and probate helpline can be called.
An often overlooked part of IHT planning is the creation of a will. As the government details, all of the above points can be organised through an effective will. If a will is not created it can create problems for an estate upon death. An individual’s estate will be “intestacy” if no will has been created.
This will mean that the estate will be shared out according to rules laid out by the government, not according to the wishes of the deceased. Generally, the estate will be passed on to close family members but as there is no pre-planning it could be hard to predict IHT bills. There is also a risk of the estate being passed onto the Crown.