When you die, the assets you leave behind for your loved ones could be subject to inheritance tax – this includes things such as money in the bank, your investments, your property and your businesses.
Basically, if the value if your assets exceed the limits set by the government, it will all be subject to a 40% tax and 36% if you leave 10% or more to a charity.
What are the limits?
- Currently, everyone is able to leave £325,000 completely tax-free and anything above that is taxed.
- The threshold is frozen until 2018.
- For people who are married, in a civil partnership or widowed, the threshold is £650,000 between them.
What you should know about inheritance tax:
- If you are married or in civil partnership and your partner dies leaving everything to you, then there is no inheritance tax
- If you are married or in a civil partnership, but do not leave everything to your surviving partner, then there may be inheritance tax, depending on whether your estate exceeds government limits
- If your partner leaves all their estate to you, they also pass on their £325,000 inheritance tax allowance which you can add to your own allowance – this means inheritance tax may only apply if your estate it worth over £650,000
How to cut inheritance tax
- Money given as gifts is subject to inheritance tax if you die within seven years of giving the gift – so it’s important to plan such gifts early
- If you are making a lifetime gift, the beneficiary can take out life insurance to help protect against inheritance tax – you may need specialist advice here
- Gifts worth less than £250 are not subject to inheritance tax
- Put some of you assets into a trust, one that you, your partner or your children under age 18 won’t benefit from. Some people set up a trust to pay for grandchildren’s education, for example. Trusts are legal arrangements and are looked after by trustees – you must put in your will what you want done with that trust
Some types of trusts may be subject to inheritance tax and the rules are complicated, so seek advice.
- If you have life insurance, make the payment of your life insurance into a trust, otherwise the payment will make your estate bigger and could be subject to inheritance tax
- Conditional marriage gifts are exempt. The gift has to be conditional of a marriage or civil partnership, not just an ordinary gift. The limits are £5,000 from a parent, £2,500 from a grandparent, and £1,000 from anyone else
- If you happen to own agricultural property that is part of a working farm, then a percentage may not be subject to inheritance tax. If you own woodland, the beneficiary can apply for the timber to be exempt from inheritance tax
- Gifts to charities and political parties are inheritance tax free
- Taking out life insurance can help pay for the inheritance tax bill