“Plan in Advance, Action in Time & Save Taxes for your loved once”
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It can cost loved ones hundreds of thousands when you die, yet it’s possible to legally avoid huge Tax liability or possibly pay none at all with planning in advance.
How much is inheritance tax? 40%
Inheritance tax is a tax on the ‘estate’ of someone who’s passed away. How much you pay depends on the value of the deceased’s estate – which is valued based on their assets (cash in the bank, investments, property or business, vehicles, payouts from life insurance policies), minus any debts.
Importantly, there is normally no tax to pay if:
• Either the value of your estate is below £325,000.
• Or you leave everything over £325,000 to your spouse, civil partner, a charity or a community amateur sports club.
If neither of the above applies, your estate will be taxed at 40% on anything above the £325,000 threshold when you die (or 36% if you leave at least 10% of the net value to a charity in your will).
What happens if I inherit my parents’ home?
In the tax year 2021/22, no inheritance tax is due on the first £325,000 of an estate, with 40% normally being charged on any amount above that. However, what is charged will be less if you leave behind your home to your direct descendants, eg, children or grandchildren. This is because you will then have two tax-free allowances:
• £325,000 – this is the basic IHT allowance, which still applies.
• £175,000 – since 2015 you’ve also been able to take advantage of something called the ‘residence nil rate band’, commonly known as the ‘main residence’ band. This is an additional allowance you’ll receive ON TOP of the existing £325,000 inheritance tax allowance if you pass on a main residence to your children or grandchildren.
This means inheritance tax might not be due on the first £500,000 of your estate (£325,000 + £175,000), depending on who you leave your home to. However:
• 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.
Let’s say you’ve got an estate worth £525,000. You’ve decided to leave your home to your children. This means no inheritance tax will be charged on the first £500,000 (£325,000 basic allowance + £175,000 main residence allowance). There’ll be a 40% charge on the remaining £25,000, giving a total of £10,000 in tax (presuming you’re not leaving anything to charity).
If you weren’t leaving your home to your direct descendants, you’d pay nothing on the first £325,000 of your estate, and 40% on the remaining £200,000, meaning a total of £80,000 to pay in inheritance tax.
Are the rules different if I’m married?
There are special rules for married couples or those in civil partnerships – they state:
• When you die, assets left to your spouse or registered civil partner, provided they’re living in the UK, are exempt from inheritance tax.
• On top of this, your partner’s inheritance tax allowance rises by the percentage of your allowance that you didn’t use, meaning together a couple can currently leave £1m tax-free (2 x £325,000 tax-free allowance + 2 x £175,000 main residence allowance).