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6 Things You Didn’t Know About Inheritance Tax

Inheritance tax, often abbreviated to IHT, is a somewhat confusing matter for some

Research from 2018 revealed that fewer than 30% of over 50s understood inheritance tax and the terminology used when discussing it. Only 27% of respondees could explain what the ‘nil-rate band’ is and identify it is currently set at £325,000.

What is inheritance tax?

Inheritance tax is a fee levied against money and property that an individual acquires as a result of somebody passing away and leaving a will. Everyone in the UK has a tax-free inheritance tax allowance of £325,000 and this is known as the nil-rate band. The standard inheritance tax rate for 2018-2019 is 40% of anything in an estate over the £325,000 threshold. Therefore, if you left somebody £500,000 the receiver would pay 40% on just £175,000. Take a look below at how £500,000 would be broken down if you left it to a child or grandchild:

Inheritance

       £500,000

Inheritance tax threshold

       £325,000

Taxable amount

       £175,000

40% of £175,000

       £70,000

Leaving recipient with

       £105,000

£325,000 + £105,000

       £430,000 after tax

To help you get to grips with inheritance tax we have outlined five of the must-know features of IHT below so that you can plan accordingly for the future and avoid pitfalls.

Do I pay IHT if I am married?

If you or your partner pass away, assets left to the remaining spouse or civil partner will not be subjected to the 40% inheritance tax. This means if you leave your husband or wife £425,000 – they will receive exactly that sum free of IHT.

Does inheritance tax just apply to property and money?

When you pass away it isn’t just property and cash you own that the government will take into consideration. You will often hear the term ‘estate’ used and this refers to:

  • Any property you own
  • Any business you own
  • Cash in the bank
  • Investments
  • Vehicles
  • Pay-outs from life insurance policies

Remember, your estate is not just all your assets added up. Your estate will be based upon a financial figure of all your assets with any debts and liabilities deducted.

Is 40% IHT a set rate that will never change?

Inheritance tax is currently only ever paid if your estate is worth more than £325,000. However, if you leave 10% of your assets to charity this levy is dropped to 36% on any inheritance when you pass.

What happens if I gift somebody assets or money?

You are welcome to gift people your assets as you wish. There are no rules on what you cannot give to somebody. Those who receive gifts will not have to pay inheritance tax if the monetary value is £325,000 or below.

However, if you were to gift somebody £250,000 in assets, they would have to pay IHT (40%) if you were to die within seven years. This means they would owe HMRC £100,000 in inheritance tax.

What is the Residence Nil Rate Band (RNRB)?

As of 2017, a new inheritance tax rule was introduced. Each individual in the UK is now able to claim an additional allowance of £100,000 to offset the sale of a property upon their passing. This is in addition to the £325,000 IHT threshold.

This means an individual could pass on a property worth £425,000 or less tax free. Or, a couple could do the same for homes valued up to £850,000. The RNRB threshold is set to increase to £175,000 in 2020. This would mean individuals could inherit properties for over £1million without paying a penny to the HMRC.

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