Friday, June 21, 2024

All you need to know about inheritance tax in the UK

Inheritance tax might not be the most exciting topic, but if you’re thinking about your own legacy for loved ones it’s important to understand. In the UK, inheritance tax is a significant consideration for anyone planning their estate or dealing with the loss of a loved one.

We’ve put together a straightforward guide to help you understand the basics of inheritance tax without getting bogged down in jargon.

What is inheritance tax?

Inheritance tax is charged against the value of the personal assets of someone who has died. In the UK, this tax is determined by the value of the deceased’s estate at the time of their passing.

Understanding the Nil Rate Band and Main Residence Nil Rate Band

The good news is that not everyone has to pay inheritance tax. That’s thanks to a threshold below which you don’t pay a penny in inheritance tax, known as the Nil Rate Band (NRB). Right now, the NRB is set at £325,000. So, if the overall value of your estate sits below this figure, no inheritance tax will be payable.

In addition, there’s a further allowance known as Residence Nil Rate Band (RNRB). If you leave your estate to direct descendants, i.e. children or grandchildren, you can claim a further £175,000 on top of the usual NRB. This can raise the threshold to half a million pounds per person or £1 million per married couple or civil partnership.

How much does inheritance tax cost?

Good question. If your estate happens to exceed any of the thresholds discussed above, the remainder is taxed at 40%. However, you can look to reduce this to 36% if you agree to award a minimum of a tenth of your estate to a charity of your choosing.

Gifting can be a key factor in estate planning. Individuals can gift £3,000 per tax year in gifts without it being included as part of the overall estate. Gifts to spouses, civil partners, charities, and even political parties are also protected from inheritance tax.

It’s also possible to make potentially exempt transfers (PETs). Let’s say you gift your home to your children. If you live for seven years beyond the gifting, it won’t be counted towards your estate for inheritance tax purposes.

If you don’t think that far ahead, when you pass away, your property will be awarded to your next of kin or named heirs in probate. This can be a stressful time for those who inherit a property. It can be difficult for people to know what to do with it. Some don’t realise they can’t sell it immediately. A probate house sale can only be proceeded once the deceased’s will has passed through probate. Laws on probate and inherited properties differ in Scotland compared with the framework in England and Wales.

It’s also important to have the estate valued accurately. HM Revenue and Customs (HMRC) must be informed of the value of the assets involved and any inheritance tax due must be paid within six months of the deceased’s passing.

By planning your estate in advance, you can minimize the impact of inheritance tax, whatever stage of life you’re at. As ever with financial planning, it’s best to seek professional advice on maximizing available allowances and reliefs to ensure more of your possessions go to your loved ones.