How Does Inheritance Tax Work?
Five things are taxed upon an individual’s death: cash, investments, property, vehicles, and life insurance pay-outs. All a person’s assets, above a threshold of £325,000, are taxed at a rate of 40pc.
There is an exemption for the main residence – called the ‘family home allowance’ which will apply to a main home being passed on to direct descendants.
How Can You Minimise Your Tax Hit?
The amount an individual can pass on without paying any inheritance tax is £325,000 – the ‘nil-rate band’. This can be extended if you include a residency, allowing you to qualify for the residence nil-rate band (adding an extra £125,000 to the threshold amount). It is important to note that this residence nil-rate band increases each year, so by 2020 an individual can potentially pass on £500,000 completely tax-free.
Married couples/Couples in civil partnerships can also extend their threshold amount – if a partner passes away without using the full amount of their tax threshold the remainder is passed to the person who survives them (this has the potential to double the tax-free amount).
How Can You Use Gift Allowances?
Finally, you can gift money to help reduce inheritance tax. Anyone can give away assets/cash up to £3,000 in value tax free as a gift, if giving to a child this allowance is raised to £5,000. Between married couples/couples in civil partnerships all gifts are tax-free.
Gift-giving can become more complex, for example gifts given close to a person’s death can be taxed under inheritance.
If you are looking for financial advice on inheritance tax or anything else, then talk to our local financial adviser team today. Please call on 01926 492406 or email us at email@example.com to make an appointment.