Inheritance tax keeps cropping up in the news. With political debate surging about the tax, we look at the basics of inheritance tax and why you need to estate plan for the benefit of your family and loved ones.
The Will and estate planning team at Solomons Solicitors can help you with all your Will and estate planning needs.
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What is inheritance tax?
Inheritance tax (IHT) is payable on a deceased’s estate if the estate is not exempt from the tax. Your heirs could face a tax bill of up to 40% of the value of your non-exempt estate. That is why it is worth understanding what IHT is and how it works.
IHT typically must be paid when an estate (comprising the deceased’s property, finances, and belongings) is worth more than £325,000 at the time of their death. The £325,000 is referred to as the ''inheritance tax threshold''. The threshold is set annually by the government. Will solicitors recommend you consider estate planning even if your estate does not meet the threshold because your estate may increase in value through property price rises or stock market increases, and subsequent governments may not increase the IHT threshold.
The residence nil rate band
In addition to the IHT threshold of £325,000, there is a residence nil rate band of £175,000. If you own property and you are passing it on to your children or grandchildren, they still have the flexibility to sell the property later.
The residence nil rate band (RNB) is added to the IHT threshold of £325,000 so if you are leaving your estate to family and it includes a property, IHT of 40% is only payable if the value of your estate exceeds £500,000 (assuming that the house is worth at least £175,000 of your estate).
Reducing the inheritance tax rate
Although the current IHT rate in England and Wales is 40% on anything above the £325,000 threshold (or £500,000 if the estate qualifies for the RNB of £175,000) the IHT rate can be reduced to 36% if 10% or more of the estate’s net value is left as a gift to a charity.
For some estates, a gift to charity can be tax-efficient. There are many ways a Will solicitor can help with estate planning to reduce potential IHT liabilities. For example, through advice on lifetime gifting.
Some estates are referred to as ‘’exempt’’. This means they are not liable to pay IHT. Examples of exempt estates include:
- The value of the estate is under the IHT threshold of £325,000.
- The estate is left to a husband, wife, or civil partner – this is referred to as the ‘’spouse exemption’’. A spouse may be able to use their deceased spouse’s IHT threshold if their spouse died before them. This gives them an allowance of £650,000 before IHT needs to be considered.
- The estate is left to charity.
Saving money through estate planning
There is an argument to say you should not worry about IHT as you will not need to pay it – your estate will. However, Will and Estate Planning solicitors say that approach is short-sighted as if you do not organise your affairs your estate may be liable to pay IHT (or more IHT), and your family, loved ones and the beneficiaries named in your Will could suffer financially because you did not estate plan during your lifetime. Saving money through estate planning is therefore a worthwhile exercise as it protects your loved ones and beneficiaries.
Speak to our Will Solicitors today
Solomons Solicitors can help you with all your Will and estate planning needs, making sure you understand your options and you have the legal paperwork you need to provide peace of mind.