Do You Understand Inheritance Tax?


Inheritance tax and how you need to plan ahead

With average house prices creeping up (currently £256,400), it’s becoming less and less difficult to fall within the inheritance tax (IHT) threshold and without the right advice, inheritance tax can incur a weighty tax bill. But what is inheritance tax, who understands it and how can people plan for the future?

According to research,

  • 30% of over-50s don’t understand inheritance tax terminology (Alan Boswell Group)
  • 27% are unable to identify the nil-rate band (Alan Boswell Group)
  • Over half of over-55s don’t understand their own IHT liability (Time Investments)
  • 31% have never checked what the rules are (Time Investments)

In this year’s 2021 Spring Budget, the UK government announced a freeze on tax-free allowances including inheritance tax until April 2026. So for now no hikes.

How does IHT work?

Inheritance tax (IHT) is the 40% tax applied after a person dies, to estates worth over £325k or more, usually if a home or sale proceeds of a home are included, along with savings, possessions, property, pension funds (certain ones) and the value of any money/property you gifted during the 7 years prior to death (subject to certain exclusions).

In the absence of any available reliefs, inheritance tax is as mentioned, charged on an individual’s estate where its value exceeds £325k at 40% – but it is only charged on the part of your estate above this threshold.

Personal assets held upon death include land and property, but also savings, quoted shares and chattels (e.g. livestock, cars and other intangible personal property). If the total value of the estate is under the £325k threshold, there may still be a requirement to report taxable assets to HMRC.

Inheritance Tax Planning

While everyone’s circumstances in regards to assets, intentions and family circumstances are very much bespoke and individual to the tax payer, some basic things apply. If you leave your estate to a spouse or civil partner, they shouldn’t have to pay IHT. Your Nil Rate Band may also be passed on to them (spousal exemption).

The government also gives you an extra allowance if you leave your home to your children/grandchildren known as the residence nil-rate (RNRB). The RNRB has been frozen at £175,000 until 2026 (Money Mentor).

If you donate money to charity or leave money in your Will for a charity, it is classed as ‘charitable legacy’ and won’t count towards your estate. If you leave at least 10% of your net estate to a charitable organisation, you may also reduce your IHT liability to 36% from 40%.

Whether it’s money, possessions or property, you can give away capital each tax year (worth up to £3,000) without an IHT charge. Or, you can give as many gifts up to the value of £250 throughout the year, without having to worry about IHT. Regular giving of a set amount can also be exempt under the correct circumstances.

Understanding inheritance tax and being prepared for the future is advisable, and LHP is well placed to help with over 85 years’ experience in these matters and qualified chartered tax advisors. As specialist chartered tax advisors and probate accountants, LHP deals with all aspects of inheritance tax planning, Probate and estate administration.

We can research and assess the value of estates, prepare inheritance tax accounts, deal with income and capital gains tax liabilities, gather assets and pay creditors. We can also advise on tax implications connected with selling assets. When the time comes, our team can help clients navigate this difficult phase with the least amount of stress and with as much support as needed.

Let’s Talk

From calculating your inheritance tax liability to helping to plan ahead, our team can help alleviate worries and place you in the strongest possible position, let’s talk.

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