What is UK inheritance tax?SmartWill
Inheritance tax is a charge on the estate of a deceased person, often called colloquially ‘death duties’, they are paid on the value of the deceased’s estate.
The estate can include money, personal possessions, property and anything else of value.
In this post, we’ll take you through some of the main points to think about when looking at inheritance tax.
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How much is inheritance tax?
The standard rate of inheritance tax is 40% and this is levied on estates over £325,000.
Anything below this allowance, called the Nil Rate Band (NRB), is tax-free.
As an example, if we imagine an estate worth £500,000, inheritance tax will only be charged on the amount over the allowance.
In other words, £500,000 – £325,000 = £175,000 x 40% = 70,000 tax.
Although the standard rate is set at 40% there are ways that this is reduced depending upon what is left, when it is gifted and who receives it.
This includes things that were left to people in a Will but also includes any gifts made in the preceding seven years.
What things reduce inheritance tax?
The first thing to note is that there is no inheritance tax on assets passed between spouses or civil partners.
Although the standard allowance is £325,000 there is an extra amount for property called ‘The Residence Nil Rate Band’.
This 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 £175,000 for their home (for the 2020-21 tax year) up to a total of £1m.
Consequently, if you leave your property to your children or your grandchildren (including adopted, foster or step-children), you will gain the additional tax-free allowance of £175,000.
This is a personal limit and so for a married couple could add up to £350,000 and where not used is passed on to the surviving spouse.
As there is no inheritance tax between spouses and any unused allowances are both transferable, this means that the surviving spouse could have a tax-free nil rate band of up to £1m.
Save tax by giving to charity.
Any gifts made to a registered charity is free of inheritance tax and this is a great way to make sure your chosen cause receives as much money as possible.
The same is true if you leave money to a political party or an amateur sports club.
The good news is that if you gift 10% or more of your estate to one of these groups then the main rate of inheritance tax on the rest of the estate is reduced to 36%.
You can also save money if you own a business or a controlling share in an unlisted company by using the Business Relief scheme.
As always it is important to get experienced help when planning your estate for tax purposes and if you need help then our experienced team will be only too happy to help.