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Inheritance Tax

How much inheritance tax do I have to pay?

Inheritance tax – plan wisely to save thousands

Inheritance tax can run up to 40% of a bequest so it is worth spending some time making sure your estate doesn’t get reduced unnecessarily.

Sensible inheritance tax planning can actually save people a considerable amount of money but you must think about this in good time and when you are making your Will.

What estates won’t pay inheritance tax?

Probably the best place to start is to identify who isn’t at risk of paying what is, after all, a high rate of tax.

If your estate in total (that is all of your assets minus any debts) is under the £325,000 threshold then there will be no inheritance tax to pay.

If you leave your estate to a charity or to a community amateur sports cub then again there will be no tax to pay.

Estates that total more than the inheritance tax threshold of £325,000 won’t pay tax where all of the value and assets are left to a spouse or civil partner.

Main residence allowance

There is a further allowance that helps people who have a house that will be included in their estate.

The main residence allowance gives individuals up to an extra £150,000 allowance for their home (for the 2019-20 tax year).

As long as you are leaving your house to a direct descendent, either a child or grandchild. Nieces and nephews, or friends, for example, do not qualify.

You do need to remember however that if your total estate is worth more than £2m, the extra allowance reduces, falling by £1 for each £2 above the threshold.

The good news is that the main residence allowance is personal and, in some circumstances, this can be passed on to the surviving spouse. This means that is could rise to £300,000.

Inheritance tax between spouses

We’ve already seen that there is no inheritance tax payable between married couples or those in a civil partnership and there is another benefit that can help with estate planning here.

Not only can the first partner to pass on bequeath their estate to their partner they can also hand over their unused inheritance tax allowances.

This means that the first partner to die will have their own personal allowance of £325,000, plus they will have £150,000 main residence allowance.

On their death, this will be passed to the surviving partner and, combined with their own personal allowances they will have £950,000 worth of allowances that apply to their estate in turn.

Gifts as wedding presents are also disregarded and this needs to be made on or shortly before the wedding. The limits here are £5,000 for children, £2,500 to grandchildren and £1,000 to anyone else.

Think about trusts

Trusts are also helpful when planning your estate and as it’s such a large subject we have produced a guide that covers all the aspects of trust planning which you can access here TRUSTS

Above all, we’d suggest that you take experienced advice on estate planning as there are many other possibilities, such as if you won a farm or woodland.

We’re happy to help you with this, simply contact us and we’ll talk you through your options.

Charity giving can help

The main rate of inheritance tax is 40% of everything over the relevant allowances however there is a way that this can be reduced.

By leaving at least 10% of your estate to a registered charity you can reduce the tax rate paid on the rest of the assets to 36% which could end up being both an excellent altruistic gesture and a sensible tax planning move.

Use your gift allowances

There are some useful gift allowances that can be used up that will be inheritance tax-free.

We should say at this point just giving away all of your assets before death won’t save tax as gifts given up to seven years before death are still taken into account for tax.

You can give everyone you know a total of £250 per year with no tax implications whatsoever and they don’t get included in your gifting allowance.

People are also allowed to give a further £3,000 per year inheritance tax-free and if this is not used in one year can be carried on to the next.

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