Inheritance Tax: How Does It Affect You?

Inheritance Tax

When you pass away and leave assets to family or any other beneficiaries, they are liable for paying tax on those assets, known as Inheritance Tax (IHT).  However, it is possible to significantly reduce the amount of IHT payable or, indeed, pay nothing at all depending on the value of any assets, known as your estate.

How much is inheritance tax?

How much IHT your beneficiaries pay largely depends on the value of your estate, or your assets which include any investments, life insurance policy payouts, property and even cash in the bank. 

If the total value of your assets is less than £325,000, your beneficiaries will not be paying any inheritance tax.  But if your assets value is above this threshold, they will pay 40% on the value of the assets above the threshold.  For example, if your estate is valued at £500,000 and your threshold is £325,000, you will only pay IHT on the estate value above the threshold, i.e. £175,000.

However, there are exceptions to this basic rule.

Inheritance tax for married couples

If you are in a civil partnership or are married the thresholds are different. If you die before your spouse:

Inheritance tax relief

There are various exemptions and tax reliefs that may apply to your estate, such as the nil rate band (NRB), taper relief and business property relief. 

How do gifts work in terms of inheritance tax?

There are some ‘gifts’ you can make prior to your death which will reduce the level of inheritance tax payable and, in some cases, mean no tax is paid.  A gift includes:

Gifts do not include any assets you leave to beneficiaries in your will.  Those assets, such as cash in the bank, possessions and any other property, are considered part of your estate and are valued accordingly for inheritance tax purposes.

Any gifts to your spouse/civil partner during your lifetime are exempt from inheritance tax as long as you are legally married or in a civil partnership, and they permanently live in the UK.  In addition, any gifts to political parties or charities, if they are before your death, are exempt from IHT.

Every person is allowed to give away up to £3,000 worth of gifts in any tax year and they won’t be added to their estate, and therefore be liable for IHT.  Known as an ‘annual exemption’, you can gift £3,000 to one person or distribute the amount between different people.  You are also allowed to carry it forward to the next tax year, but only for a single year.

This inheritance tax exempt rule also applies to annual birthday or Christmas gifts, up to the value of £250, as well as gifts towards a wedding or civil partnership ceremony.

At Probates Online, we are able to offer a professional probate service online that is efficient and affordable.  If you are an executor of a will and need to apply for a Grant of Probate or would like to take advantage of our entire Estate Administration service, visit our website for more information or contact us today.