What is Inheritance Tax?
By answering these most-asked questions, this article will share with you the fundamental concepts of IHT as well as give you some tips on how to avoid or reduce IHT.
Inheritance Tax refers to the amount of money that must be paid from passing on the estate of someone who’s died. An estate refers to the net worth of the person which includes the property, savings, pension funds, and other assets minus the debts and liabilities. The payment should be submitted to HM Revenue and Customs (HMRC).
What is the Inheritance Tax Threshold
The amount of Inheritance Tax to be paid depends on the declared value of the estate. No IHT will be paid on the first £325,000 of the estate’s value. Anything above £325,000 is subject to a 40% tax.
For example, the declared value of your estate is £ 900,000. Your tax-free threshold is £325,000. Thus, only £575,000 is the amount to be charged for IHT. Forty percent (40%) of £575,000 is £230,00. The basic threshold is £325,000 which is called the Nil Rate Band (NRB). If the estate worth less than £325,000, zero IHT will be levied.
However, there’s a special rule to this; if the estate is passed on death to the direct descendants, there will be an additional Nil-Rate Band of £175,000 (additional amount for 2020-2021 tax year) and it will then be increased in line with Consumer Price Index from 2021-2022 onwards.
If the estate will be passed on to the spouse or civil partner, zero IHT will be imposed provided that the civil partner or spouse is permanently dwelling in the UK. The same rule applies if the estate will be passed on to a community amateur sports club or a charity,
“No Inheritance tax will be paid on the first £325,000 of the estate’s value. Anything above £325,000 is subject to 40% tax.”
A threshold can increase to £500,000 if the estate, specifically a person’s home, will be passed on to the person’s children provided that the market value of the property is not more than £2,000,000. This extra threshold is known as the Residence Nil Rate Band (RNRB). However, if the estate is worth more than £2,000,000, £1 will be lost for every £2 worth of market value.
How to Avoid Inheritance Tax
There are exemptions of IHT:
- There is no Inheritance Tax for small gifts (anniversary, birthday, etc.) that a person makes out of his normal income.
- There is no IHT on gifts between spouses or civil partners provided that their partners are permanently dwelling in the UK.
- A person can give away £3,000 worth of gifts each tax year without a subject for IHT. This is known as the “annual exemption”. If a person can’t use the “annual exemption” in the current assessment year, it can still be used for the next assessment year.
- A person can give away wedding or civil ceremony gifts of up to £1,000 per person, £2,500 for a grandchild or great-grandchild, £5,000 for a child.
- No IHT for payments to help with another person’s living costs
- No Inheritance Tax for gifts to political parties and charities
- No IHT for gifts of up to £250 per person provided that no other exemption was applied to the same person.
Inheritance Tax is quite complex as it seems, but if you only know how to manage and are fully aware of the tips and tricks, you can save more than you could imagine.
To read the full article of Inheritance Tax, click here.