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Posted on 9th Sep 2016 - Share this blog/article
Inheritance Tax (IHT) has traditionally been seen as a tax only for the wealthy however, more and more people are finding that when their properties are aggregated with all their other assets, their estates are in excess of the nil rate band, meaning that IHT is no longer relevant just to the wealthy.
This could lead to people expecting an inheritance having to sell long held family heirlooms, their own assets or taking out expensive loans to meet tax bills. Careful planning could help minimise or avoid paying IHT.
Inheritance Tax is a tax on the property, money and possessions – also known as the ‘estate’ – of someone who has died. Each person has a tax-free allowance or ‘nil rate band’ on their estate. This means that their estate won’t incur Inheritance Tax if it’s under a certain amount. The threshold for the 2016-17 tax year is £325,000
Married couples and civil partners are allowed to pass their estate to their spouse tax-free when they die. In other words, the surviving spouse can inherit the entire estate without having to pay Inheritance Tax.
They can also pass on their unused tax-free allowance to their spouse. For example, if a husband dies and his estate was under £325,000, his wife can take his allowance and add it to her own tax-free allowance. This combined allowance means that when she dies, her estate will only incur Inheritance Tax if it’s worth more than £650,000.
From 6 April 2017, each person will get an additional £100,000 (rising to £175,000 by 2020-21) tax-free allowance to use against the value of their home.
They can only get this additional allowance if they leave their home to their children or grandchildren.
This allowance can also transfer to the surviving spouse if it isn’t used up already. This means by 2020-21, a married couple could leave their heirs a combined estate of up to £1 million without incurring Inheritance Tax.
If Inheritance Tax on gifts is due, it is charged on a sliding scale known as taper relief.
Inheritance Tax reliefs, eg Business Relief, allow some assets to be passed on free of Inheritance Tax or with a reduced bill.
There are other exemptions and allowances which come about through distributing some of your wealth prior to death known as Potentially Exempt Transfers (PETs). They are potentially exempt because from the day you give them away the tax due on death is subject to a tapering over 7 years. There are also exemptions using small financial gifts. Life Assurance can be a key component in inheritance tax planning as is an astute use of trusts.
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