April 8, 2020

What is Inheritance Tax? - Explained

What is Inheritance Tax?

We pay enough tax whilst we're living, don't we? What are your thoughts on paying even more when you pass away? Your estate could be liable for Inheritance Tax but there are steps or precautions you could take to reduce the chances of your estate being taxed.

A light background on IHT

This isn't a new tax. It was introduced back in 1894 as an estate duty and the idea was that the government wanted to reduce the then £4m deficit.

So, what is Inheritance Tax?

 

Inheritance Tax is taxed at two rates, either zero-rated or at 40%. The zero rating is preserved as such so that the government could increase it easily should they wish.

If your estate is worth over a certain amount, known as the Nil Rate Allowance (NRA) or Band (NRB), when you die, it is taxed at the other rate, 40%. So, if your estate is worth £425,000 there will be tax bill of £40,000 to pay. Many estate are over the NRB simply because people have seen the value of their house increase exponentially over the past decade or so. It can be upsetting for the family ot be met with an unexpected bill when you have gone!

There is some good news though (for some)

We might be able to pass more to loved ones free of IHT. The government has phased in the additional Nil Rate Band in connection to the value of the main residence. It currently stands at £175,000 per person which together with the original NRB means that an individual can,  potentially pass up to £500,000 tax-free. However, not everyone receives the additional allowance and the rules are complicated. For instance, the allowance is only available if applied for and only of the house is being passed to ‘direct lineal descendants’, e.g. children, grandchildren, stepchildren and step-grandchildren.

Even better news!

If you're married, then you could potentially pass £1m down to your children or £625,000 to loved ones or friends.

How can I pay less IHT?

There are a number of things you can do. If you give more than 10% of your estate to charity, then the rate of IHT you pay on anything over £325,000 drops to 36%. And, if you gave all of your estate to charity is wouldn’t be taxable at all. You also, need to careful that your Will is written in a way that allows the allowances to be granted. Certain trusts in Wills, for example, means that the RNRB is no available. This can be a very expensive mistake, creating an unnecessary tax bill of £70,000 per person or, as is more likely, £140,000 for a couple!

If you met with (or had a telephone/video consultation) with a Fortis Consultant they will be able to tell you how much your estate is liable to pay and can help you plan to reduce your liability. There is no obligation to this and you're not forced to take our advice. If you'd like to book a consultation, simply complete the form below and we'll call to book an appointment.

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