Like most taxes, knowing when inheritance tax applies to you, how to pay it and how to possibly avoid it can be confusing. To simplify things, we’ve provided the answers to a list of questions the Hysons team are asked on a regular basis. Read on to find out more about inheritance tax and our specialist services.
What is inheritance tax?
Also known as IHT, inheritance tax is the tax that’s paid when an estate (e.g., property, money, investments, possessions) is transferred to the beneficiary of someone who has passed away, less the cost of debts and funeral expenses. Payment must be made to HM Revenue & Customs (HMRC) within six months of the estate owner’s death, after which the total due will accrue interest. This should be done by the executor of the will or the representative in charge of distributing out the estate, rather than the beneficiary.
What is the inheritance tax threshold?
Beneficiaries must pay 40% inheritance tax when the combined worth of the estate exceeds £325,000, a threshold that hasn’t changed since the 2010-11 tax year. However, if the entire estate has been left to a spouse, civil partner, charity or amateur sports club, no IHT is payable. The inheritance tax threshold increases to £500,000 when the home of the deceased is left to their children or grandchildren. Other examples of people who are often named as beneficiaries includes parents, siblings, cousins, friends or business partners.
What are inheritance tax gifts?
When you work hard throughout your career to build up your estate, you want to ensure your beneficiaries get back as much of your wealth as possible. Fortunately, you can reduce the amount of tax for your loved ones by donating inheritance tax gifts:
Share out your wealth
One way of minimising IHT is to distribute your money and possessions to beneficiaries throughout your lifetime. Each year, individuals can give away up to £3,000 of their estate tax free. With some careful inheritance tax planning, wealth can be distributed so that your estate is valued at less than £325,000 at the time of your death, allowing your beneficiaries to qualify for the basic inheritance tax allowance.
Charities and sports clubs
IHT reduces to 36% when you gift at least 10% of your estate to a charity or amateur sports club. Again, no IHT will be due if your estate is worth below the inheritance tax threshold after your donation to charity.
Make the most of trusts
If you have a life assurance policy it may be worth putting it in a trust. Any part of your estate’s value that’s stored in a trust is exempt from IHT, meaning your beneficiaries won’t receive a reduced amount once they meet the requirements necessary to access the trust.
Whilst donating inheritance tax gifts to your heirs and charities is a great way of cutting down the amount of IHT, there are some things to bear in mind. If a gift is made less than three years before your death, the 40% tax rate remains. Tax paid on any gifts donated longer than three years before the estate owner’s death decreases on a sliding scale. However, a gift received seven years or more before death doesn’t get taxed at all – something known as the 7-year rule.
Get inheritance tax advice from Hysons
Getting your personal finances in order for when you pass away can be stressful, especially when coupled with funeral planning and other end of life care arrangements. Let Hysons, Chartered Accountants relieve this pressure with our range of inheritance tax planning services. Our accounting consultants can calculate how much IHT may be due on your estate as well as complete and send all inheritance tax forms. Helping you decide how to gift any amount of your estate’s value also falls under our expertise. For more information on how Hysons can assist you with our inheritance tax advice, get in touch with us today.