The loss of a loved one is always tragic, regardless of their age or the circumstances in which they’ve passed. What’s more, feelings of despair and angst can be exacerbated when the deceased has an estate that must be managed, distributed and potentially taxed.
Whilst inheritance (IHT) tax may only be applied to estates with a value in excess of £325,000 and featured in the case of just 4.2 deaths during the financial year 2015/16, this is a particularly burdensome complication that can confuse executors and cause huge amounts of distress.
With this in mind, we’ve prepared a brief guide to IHT and strived to identify the key considerations when looking to minimising the tax payable on any given estate.
The Basics – What’s the Rate of IHT the UK?
IHT has also been a source of controversy in the UK, due largely to the fact that it creates a scenario where earned income is effectively taxed twice by the government.
The relatively inflated rate of inheritance tax has also proved controversial, with the owners of estates worth in excess of £325,000 required to pay a 40% levy. As we’ve already said, estates worth less than this threshold will not be liable for IHT, and the good news that this applies in the vast majority of cases in the UK.
Additionally, any unused threshold may be transferred to a surviving spouse or civil partner, increasing the minimum amount at which IHT is applied to a whopping £650,000.
Similarly, the rate of IHT is reduced to 36% if 10% or more of the estates’ net value is subsequently left to charity, and this is often something that enables individuals with particularly large estates to minimise the levy paid on their cash and property holdings.
The current law stipulates that this threshold should be frozen until 2020-21, at which point it will experience an incremental increase in line with published CPI inflation.
What Else do You Need to Know About IHT?
As a potential beneficiary, it’s important to understand whether IHT is likely to be applied to a particular estate, whilst also determining how this will impact on the precise amount that you receive.
However, estate owners should also be proactive and seek out expert advice and determine legally binding ways in which you can reduce the precise amount of IHT that you pay on your estate.
In addition to gifting at least 10% of the estate’s total value to charity (which may not be viable in every instance), you should note that the law enables you to gift up to £3,000 from your estate each year.
You can also gift up to £2,500 to grandchildren and £5,000 to children, while it’s possible to make unlimited offerings of up £250 others as a way of minimising the impact of IHT.
Another loophole also means that proactively managing your estate and distributing wealth well in advance of your potential passing can also negate IHT. More specifically, if you proffer gifts from your estate more than seven years prior to your death (which we appreciate is hard to plan), you can reduce the likelihood of taxation whilst ensuring that beneficiaries receive what they’re due.
On another note, spouses and civil partners are not required by law to pay tax on any assets left to them by their partner, regardless of the value of the estate left to them.