Each year, over £5 billion is generated through Inheritance Tax in the UK. This is a colossal sum and only set to increase given the events of the last 18 months. It is very important to realise that HM Revenue and Customs are first in line for their share of an estate before any beneficiaries receive anything!
In this article, we will discuss the potential Inheritance Tax contribution your estate might make to the UK exchequer.
There is a threshold for Inheritance Tax. It starts at £325,000 and it’s been at that level since 2009. That means if your estate is less than that, you will not pay any Inheritance Tax.
So, Will I have to pay Inheritance Tax is my estate is worth more than £325,000?
Your estate is made up of all of the assets, cash, property etc. that you own at the time of your death. From that figure, you take away any debts you have at the time of your death. That final figure is the value of your estate.
You might then think that, if my estate is worth more than £325,000, my estate will have to pay Inheritance Tax – currently standing at 40% of the amount over the £325,000 threshold.
However, there are a number of exemptions and allowances that mean you can pass on a lot more than the £325,000 threshold without your estate having to pay ant Inheritance Tax.
If you are married or in a civil partnership, anything that you pass to your spouse or partner is free of Inheritance Tax. Please note that if you are cohabiting but not married or in a civil partnership, you cannot benefit from this exemption. This means that if you have an estate worth, say, £450,000 which is split between the family home worth £300,000 and other property worth £150,000, if you left your house to your spouse or civil partner, there would be no Inheritance Tax to pay on the £150,000 balance of your estate even though the total estate is worth more than the £325,000 threshold.
In addition, if you have any unused allowance, this can be used by your spouse or civil partner (but remember, not by someone you are cohabiting with but to whom you are not married or in a civil partnership) when they pass away. That means if you pass your entire estate to your spouse or partner, it means your allowance of £325,000 remains intact. When your spouse or partner then dies, your unused allowance can be carried forward and added to theirs. That means that their Inheritance Tax threshold rises to £650,000 in their estate (your allowance of £325,000 plus their allowance of £325,000).
Your Family Home
There is also another allowance you can take advantage of in relation to the family home. If we follow the example above of leaving your home to your spouse or civil partner, when your spouse or civil partner dies, if they leave the family home to your children or grandchildren, they can then take advantage of an additional allowance. Both you and your spouse or civil partner are entitled to an allowance of £175,000 when the family home is left to a child or grandchild. Basically, that means that your total allowance is £500,000 and your spouse or civil partner’s allowance is £500,000, your children would have a combined allowance of £1 million of estate before any Inheritance Tax is payable. However, the nil rate band is not available if the total estate is worth more than £2 million.
There is also a “gift allowance” where you do not pay Inheritance Tax on any gifts you make to your children or other family members whilst you are alive. This allowance is available provided you survive for 7 years after making the gift. If you do die before the 7 years has passed, some Inheritance Tax will apply but the amount due will depend on how many years have passed since the gift was made. The value of the gift on which Inheritance Tax is paid reduces gradually from the third year onwards.
We would point out that we have given you a very broad overview of how Inheritance Tax works. Everyone individual’s circumstances are different and it is always best to ask for advice based on your own personal circumstances. If Inheritance Tax might be an issue, it is always better to act sooner rather than later.
If you do need advice in this area and wish to consider doing some estate planning, please get in touch with us.