Learning how inheritance tax works and planning accordingly can help to protect your loved ones in the future.
As inflation rises year on year, bereaved family members will pay higher rates of tax – what was once a tax aimed at the wealthiest is now impacting a broader band of the UK population. Alongside will writing, estate planning can help limit the inheritance tax payable.
Take a look at this blog to understand how you can limit the impact of inheritance tax and make informed choices.
What is an inheritance tax?
All your assets and estate are subject to inheritance tax when you die. The inheritance tax rate is 40% and is applied to a portion of your estate. As of 2009, inheritance tax is only paid for estates over £325,000. Anything below this threshold is in the 0% tax band bracket. This means, that on an estate worth £500,000, tax is only paid on £175,000 of the estate – this would be £70,000 paid in tax to the Government.
Initially, inheritance tax impacted the wealthy by taxing their estates worth over £325,000, hence the 0% tax threshold. The threshold has been frozen since 2009, and will remain the same until 2028, however, since 2009, house prices in the UK have risen significantly. House prices have increased over 120% since 2009, meaning inheritance tax is affecting a larger portion of the UK population.
In 2023/24, £7.5 billion was collected in inheritance tax and this figure is expected to continue to rise.
How do I value my estate?
It is important to value your estate to understand how much inheritance tax will be payable on your assets. Your estate is a combination of properties, savings, investments and other assets, globally. The three common measures of taxable estate include:
- Value of property owed
- Gifts (money and items) given less than 7 years prior to death
- Value of trusts with beneficial interest
Valuing your assets, working out any exemptions, and accounting for inflation, value appreciation and law changes, can help you understand how much of your estate is over the 0% tax threshold.
Who pays inheritance tax?
Beneficiaries of the will and estate will pay inheritance tax, however, there are exemptions to this. The tax is paid before the estate is distributed.
Spouses and civil partners do not pay any inheritance tax. Because of this, the £325,000 threshold (which is unused) is then passed onto the partner, meaning when they pass away, the threshold on the estate will be £650,000 before any tax is paid. When the child receives the estate, there is an extra £175,000 allowance added to each parent who passed away, meaning the tax-free threshold is £1 million under these circumstances.
You are able to reduce your inheritance tax if 10% or more of your estate is left to charity. In this case, the inheritance tax payable for beneficiaries falls to 36%.
With professional advice, it is possible to ensure the inheritance tax payable is as low as possible, helping relieve the burden on the beneficiaries when you pass away.
The importance of up-to-date wills
By keeping your wills and estate value up-to-date, you can plan and help minimise the impacts of inheritance tax. Planning can help make use of allowances or exemptions to minimise tax.
How Peter Ross can help
At Peter Ross, we can help ensure that your will is legally watertight. We can also advise you on the most efficient ways to minimise inheritance tax payable on your estate. Our thorough, friendly service ensures your estate is passed onto beneficiaries in the way that you intended so you can have complete peace of mind.
Get in touch with us today.