The Government assesses how much your estate is worth upon your death. This includes the cash you have in the bank or in investments, and any property or business you own, then debts are deducted.
IHT redistributes income so some of the money goes to the state to be distributed for the benefit of all.
How much do I have to pay?
The inheritance tax threshold means everyone is able to leave £325,000 completely tax-free in the 2013/14 tax year. This limit has been frozen until at least 2017/18, when the Government will look again at whether to increase it. Above that amount, anything you leave behind is subject to tax of 40% (or 36% if you leave at least 10% of your assets to a charity).
When you die, any assets left to your spouse or registered civil partner, provided they’re UK-domiciled, are exempt from inheritance tax. On top of this, your partner’s inheritance tax allowance is increased by the amount you didn’t leave to others, meaning together a couple can currently leave £650,000 tax-free. The allowance from the first partner to die is transferred to the second partner only after the second partner’s death.
As an example, if you leave behind assets worth £500,000, your estate pays nothing on the first £325k, and 40% on the remaining £175k – a total of £70,000 in tax – if you are not leaving anything to charity.
Can I reduce my IHT bill any other way?
Money given away before you die is still usually counted as part of your estate, hence subject to inheritance tax if you die within seven years of giving the gift. Early planning therefore of how to pass on your assets is important.
If you die within three and seven years of making a gift, there are a range of other exemptions worth taking into account to help lessen the tax bill such as:
Author: Bartholomew Hawkins are chartered independent financial planners. We can provide you expert financial advice, and show you all your options when it comes to inheritance tax planning. Contact us on 029 2050 8000 or firstname.lastname@example.org You can also visit our website by clicking here now.