Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who has died). Sounds simple, doesn’t it? Well, unfortunately it is not quite as straightforward as it may seem due to the many ‘it depends on…’ type scenarios to consider. Typically, you will be exempt from inheritance tax if the value of your estate is below the £325,000 threshold or if you leave everything above the £325,000 threshold to your spouse or civil partner, a charity or a community amateur sports club (you still need to report your estates’ value to the HMRC even if is below the threshold).
What if you give away your home to your children or grandchildren, I hear you ask? Well, in this instance your threshold can increase to £500,000. Plus, married couples or couples in a civil partnership with an estate worth less than the threshold, can add any unused threshold to their partners threshold when they die i.e. their threshold can potentially be as much as £1 million.
How much is inheritance tax in the UK?
In short, the standard Inheritance Tax rate is 40% and is only applied to the part of your state that is above the threshold. For example, if your estate is worth 750,000 and your tax-free threshold is £325,000 the Inheritance Tax charged will be 40% of 425,000 (750,000 – £325,000).
Will the people that inherit my estate have to pay the inheritance tax?
No, funds from your estate are used to pay Inheritance Tax to HMRC. This will be done by ‘the executor’ (the person dealing with the estate). Your beneficiaries (the people who inherit your estate) do not normally pay tax on things they inherit. However, if you have gifted some money within 7 years of your death (of more than £325,000) the beneficiary will have to pay inheritance tax on the money you inherit that falls above the threshold. As stated above, this does not apply to your spouse or civil partner.
Rules on giving gifts
The home is the main asset that most people hope to be able to pass on and if you pass your home onto your husband/wife/civil partner when you die there will be no Inheritance to pay. However, if you leave your home to another person in your Will, it will count towards the value of the estate.
What about if you give your home away before you die? Well, there is normally no Inheritance Tax to pay if you move out and live for another 7 years or more. If you want to continue living in your property after giving it away, there are a few things you’ll need to do like pay rent to the new owner (unless you only give part of the property away or the new owners live at the property with you), pay your share of the bills and live there for at least 7 years.
If you die within 7 years of giving your home away, then all or part of your property will be treated as a gift and the 7 year rule applies.
The rules surrounding paying Inheritance tax on gifts you have given, basically state that gifts given less than 7 years before you die may be taxed depending on who you give the gift to, its value and when it was given. Money, household and personal goods (such as furniture and jewellery), a house, land, stocks and shares are just some of the items that count as gifts. It is always best to seek professional advice from a solicitor or a tax adviser about what you can give away tax free during your lifetime to be on the safe side.
For full details on Inheritance Tax rules and guidelines, visit gov.uk.
We hope this is useful for anyone that has this topic on their New Year list of things to sort out. Likewise, if your finances need some tidying up or maybe you are thinking or starting up a new venture, give the Bells team a call and we will happily advise you.