Understanding Inheritance Tax (IHT) Liability

Will I have an inheritance tax bill?

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.

You’ll want to look at a few things to understand how this relates to you and whether you’ll be liable for inheritance tax. 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 relief you receive depends on your 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 inheritance tax bill was a massive £209,000 in 2018/19. So, it’s essential 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 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 that 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 everyone is entitled to, no matter your circumstances or who you plan to leave your money to. You may have heard it being called the nil-rate band – 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 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 reduces if your estate is worth a certain amount, but we won’t go into too much detail 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 can 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 would pass to your partner tax-free. But when they die, there could be an inheritance tax due.

The good news is that 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 can 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. The good news is that I am here to help and can advise what the best ways are for you to reduce inheritance tax.

Ready to take control of your potential inheritance tax? Please don’t leave it until it’s too late. Let us guide you through the process and help you make informed decisions. Click [here] now to book your free, no-obligation consultation.

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