No one wants to leave behind a hefty bill for their family to deal with. Thinking about this now, though it may seem a ‘far off’ thing to have to worry about, is ensuring that you have protections in place for any circumstance.

What is Inheritance Tax?

Inheritance tax is the tax paid on assets left when someone dies. When you pass away, the government will assess how much your assets are worth, and then deduct your debts from this, to give the value of your estate. Let’s just drill down quickly into what your list of ‘assets’ could include:

  • Your investments
  • Your vehicles
  • Cash in the bank
  • Your home
  • Other properties or businesses that you own
  • Life insurance policy pay-outs

What is the tax burden? How much tax will I pay?

If your estate is over the IHT threshold of £325,000 (per person), you will be taxed at 40%. Couples can leave assets worth £650,000 without attracting inheritance tax (singles £325,000).

In 2017, a new ‘main residence’ allowance was announced, as an extra property allowance that allows you to leave your home to direct descendants (Children, Step-children, Grandchildren) tax-free. This is gradually being introduced as follows:

  • From the 2018 tax year, it starts at at £100,000 (meaning a total allowance of £425,000), rising by £25,000 each year, until it reaches £175,000 in 2020. This means a total allowance of £500,000
  • The maximum that can be passed on tax-free is currently £850,000 for married couples and £425,000 for singles.
  • In 2020, the tax-free amount will rise to £1 million for couples and £500,000 for singles.

Example: If you leave behind assets worth £500,000, your estate pays nothing on the first £420,000 and 40% on the remaining £75,000.

What if your estate is above the IHT threshold? Can you gift it?

If you are above the threshold, it may seem like a good idea to gift your home to your children. Easy, right? As long as you survive 7 years from the date you gift it, it’s theirs.

Unfortunately, not.

First, you’ll have to pay your children full market rent to live there. And they’ll pay tax on that rent. Otherwise it stays in your estate as ‘gift with reservation’.

On top of that, as a second home, they’ll also be subject to capital gains tax on the price rise when they do decide to sell.

Not to worry though – you can offset this impact.

Everyone has an annual tax-free gift allowance of £3,000 a year, together with additional allowances for weddings, small gifts of up to £250 each and gifts out of income. These are all relatively small unfortunately, but there are also plenty of options available that can have a greater impact, including loan trusts and discounted gift schemes.

Overview of ways you may be able to cut your inheritance tax bill:

  • Make a gift to your partner (married or civil partnership).
  • Give to family members.
  • Put assets into a trust.
  • Leave something to charity (if you leave at least 10% of your estate to charity, it will cut your inheritance tax payment to 36%).
  • Take out some life insurance (it could help your family pay for the IHT bill)
  • Discounted Gift Trusts
  • Family investment LLPs structured correctly

Want to know more about these in depth? Let us help you to protect your family by giving you the personalised tax advice you need to feel secure.

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