Inheritance Tax is a type of tax that most of us have heard about, but hardly any of us know the ins and outs of, or how it can be affected by writing a Will. This section covers everything you need to know about Inheritance Tax.
If the wealth that you are leaving behind as an inheritance for your beneficiaries exceeds a certain threshold set by HMRC, then a tax known as Inheritance Tax will be applied on any amount over that threshold. The current threshold is £325,000 for individuals and £650,000 for couples. Any value on an estate over that threshold is currently taxed at 40 percent.
Those estates that are valued below the threshold set by HMRC are said to fall into the Nil Rate Band. There is no tax that needs to be paid on these estates.
However, it is not just the value of the estate that is taken into consideration when calculating the worth of a legacy. Any gifts made within seven years prior to the death are also included in these calculations. This is to stop people giving away all of their estate as gifts just before they die as a way of avoiding tax.
The value of your estate can be lowered by certain gifts that may have been given away by you during your lifetime. These gifts are treated as exemptions and they bring down the overall value of your estate.
For instance, if your estate is worth £400,000 but you have given away gifts worth £80,000, then the value of your estate stands at £320,000 which is below the Inheritance Tax threshold and therefore your executors are not required to pay Inheritance Tax on your estate.
Only certain types of gifts are exempt from Inheritance Tax. However, they are a useful way of lowering your Inheritance Tax liability and at the same time allowing you to see the benefits of passing on some of your estate while you are able to see people enjoy the benefits.
The following types of gifts are exempt from Inheritance Tax:
There are different ways you can go about donating to charity and helping to reduce your Inheritance Tax bill at the same time.
You can donate a fixed sum or an item to charity, either while you are still alive, or in your Will. Or you can state in your Will that you want whatever is left after all the other legacies have been paid out, to go to your chosen charity.
Your donation can be taken off the value of your estate, therefore lowering the Inheritance Tax due on it, or if you are donating more than 10% of the net value of your estate to a charity, you can enjoy an Inheritance Tax reduction from 40% to 36%. The net value of your estate is the sum of all your assets after deducting any debts, reliefs, exemptions and liabilities. It may be, however, that only some of your estate qualifies for the reduced rate therefore it is highly advisable you seek professional advice from an experienced Trust & Estate Planning Consultant to ensure your beneficiaries will not be paying more tax than is necessary.
The charity (or charities) you choose to donate to is entirely up to you, however, the charity must be a qualifying charitable body; i.e., a charity registered in England and Wales, or a charity registered in the EU, Iceland or Norway that would qualify if it was in England or Wales.
If you are a beneficiary to a Will and have found that either a charitable gift was not left in the Will, leaving the estate with a large Inheritance Tax bill, or if the gift did not amount to 10% of the estate, speak to our Trust & Estate Planning Consultants about a Deed of Variation. The Deed of Variation allows beneficiaries to vary the terms of the Will to include a charity donation or to increase the value of an existing charitable donation in order to gain the reduced rate of Inheritance Tax.
It is not the case, as it once was, that Inheritance Tax problems are the preserve of the wealthy. An average house and modest savings could easily put your estate within the Inheritance Tax threshold these days. However, with the right financial planning, practically everyone with an Inheritance Tax liability should be able to reduce or even eliminate it.
Our professional Will writers have a vast amount of experience in tax planning for both large and small estates. We will explain your options fully and provide you with a solution to ensure that as much of your estate as possible qualifies for the reduced rate.
The law surrounding Inheritance Tax can be highly complex and confusing. We are experienced in Inheritance Tax planning and will tailor a plan for you which will bring the maximum amount of your estate within the discounted Inheritance Tax rate. We can explain your options fully, giving you a clear understanding of the choices open to you, and guiding you smoothly through the entire process.
