Considering what will happen after you have passed away is not the happiest subject, but it is necessary to consider how to ensure your loved ones are well looked after.
One key consideration is who will inherit your estate, along with whether they will be required to pay Inheritance Tax (IHT).
Whilst who will inherit your estate will be outlined in your Will, you may not have thought about the impact of IHT on how much they will receive.
Depending on the nature of your estate and marital status, IHT may begin to be due if your estate amounts to £325,000 or more. However, there are many circumstances in which this initial allowance, known as the Nil Rate Band, is increased.
For instance, if you own a property and leave it to a direct descendent, the Residence Nil Rate Band will be applied, increasing the tax-free allowance for the estate to £500,000.
Another exception to the threshold applies if you are married or in a civil partnership and your estate is valued under the taxable threshold.
In this case, your remaining allowance can be added to your partner’s threshold, which could increase your combined threshold up to as much as £1 million!
Even if your estate is valued above these figures, there are several measures you can take to minimise the level of taxable income.
If Inheritance Tax is due, the standard tax rate is 40 per cent, which is charged on the part of your estate that is above the threshold.
How can you reduce the amount due?
As mentioned, you can plan ahead to reduce the proportion of your estate that will be subject to IHT, and even be charged a lower rate of tax.
For instance, if you leave at least 10 per cent of the value of your estate to a charity in your Will, the IHT rate is lowered to 36 per cent on some assets. This is due to charitable legacies not counting towards the taxable value of the estate.
Another way to reduce the taxable amount of the estate is through gifts. If you choose to give small gifts during your life, these are usually exempt from Inheritance Tax.
Although, if you give away more than £325,00 in the seven years before your death, this could be classed as part of your estate and thus, liable to IHT.
There is also an annual exemption allowing you to transfer £3,000 worth of gifts, which can also be carried over for one year if it has not been used.
Planning for IHT can reassure you that your family is financially secure after you die, but it can be complex. Therefore, it is best to consult an accountant for advice on your options.
Need advice on Inheritance Tax? Contact our team today.