A guide to Inheritance Tax; the basics we should all know.
What is Inheritance Tax?
Only estates over £325,000 are large enough to incur Inheritance Tax (IHT), but you mustn’t forget to factor IHT into your plans when you make your Will.
IHT is the tax applied to a person’s estate (their money, properties and possessions) after they have died. Once a person dies, the total value of their assets will be calculated in order to determine how much of it will be taxed.
When I die, how much of my estate is taxable?
The first £325,000 of a person’s estate will be tax free. Anything over the £325,000 threshold will be subject to 40% inheritance tax. There are several circumstances however which can result in the threshold and percentage changing, and so it is always best to get specific advice about your circumstances.
Can I reduce my liability to IHT?
- IHT is not paid if everything is left to a spouse, civil partner or charity in your Will.
- If you own your house when you die and leave it to children in your Will (including stepchildren and foster children) or grandchildren, the threshold will be increased to £475,000, dependant on the value of the home and the share owned.
- If your spouse has died before you, and left everything to you in their Will, in the event of your death, the IHT threshold can increase up to £950,000. In the tax year 2020/21, this addition will be increased by £25,000 per person, meaning that a married couple, who own a £350,000+ house, and leave it to their children could benefit from a tax-free allowance of £1,000,000.
Is there anything else I need to consider?
The 40% inheritance tax percentage can be affected. For example, if on your death, you decide to leave 10% of your total net estate to charity, the tax will decrease from 40% to 36%. It does mean however that the total inheritance money passing to the intended beneficiaries (usually family), will be reduced.
How can I calculate the value of my estate?
To give you an idea of the value your estate, list out all the assets and calculate the total value. Deduct any debts and liabilities. Keep all records of how you worked this figure out e.g. the estate agent’s valuation. Assets include items such as cash in a bank or building society, property, land, shares and investments, jewellery, cars, payments from pension(s) where not previously nominated, a pay-out from an insurance policy where not previously nominated and jointly-owned assets.
Gifts also need to be included, such as cash or other assets, if they were given away in the seven years before death. If the person you gave the gift to continues to benefit from the gift, this needs to be included, for example a house which was gifted, and the person continues to live in it.
Debts and liabilities reduce the value of the chargeable estate, so remember to deduct and record items such as final household bills, mortgages, credit card debts, and a rough cost of funeral expenses. Any costs incurred after death, such as solicitor’s and probate fees, can’t be deducted from the estate’s value for IHT purposes.
Support with Inheritance Tax from Lawson-West Solicitors
If you require advice or support concerning IHT payments or planning, calculating the value of your estate, or if you would like to start planning a Will, please contact Phoebe Tranter on 0116 212 1055 or email firstname.lastname@example.org.
Lawson-West Solicitors has offices in Leicester, Wigston and Market Harborough, and we also offer home visits.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.View all