Inheritance Tax rules are set to change from April 2017, but what do you need to know to protect your estate now?
Inheritance Tax (IHT) is a tax that affects almost everybody. Also known as ‘Death Duties’, this tax is levied on the value of your estate when you die – before it can be passed on to your heirs.
IHT is 40% of the value of your estate over the current threshold of £325,000.
But what counts as your ‘estate’?
Assets that count towards the taxable threshold can include:
- Your house – whether singly or jointly owned
- Your car
- Your jewellery and other personal belongings
- Your bank accounts, including joint accounts
- Your furniture
- Your pension, if it includes a ‘lump sum’ payment on death
- A payout from a life insurance policy
- Shares in your business
Even if you don’t own your own home, but have the right to live there rent-free under the terms of a will, you may have to count it as an asset (full details of what counts as an asset under IHT can be found at gov.uk).
What if I pass on the ‘inheritance’ before I die?
Gifts given within seven years prior to death will be added to the value of the estate and are still subject to some Inheritance Tax.
For gifts given more than three years prior to your death, there is a form of tax relief known as ‘Taper Relief’.
Can my debts mitigate the amount of IHT paid?
The short answer is yes. Certain debts can be deducted from the value of your estate. Gov.uk lists these as being:
Mortgages or secured loans (although if these are jointly held, only your share is deducted)
- Loans, credit card debts, overdrafts, etc.
- Debts owed to family or friends
- Gambling debts
- Guarantee debts
- Funeral expenses
Once these debts and liabilities have been deducted from the assets, you are left with the value of the estate. This is the amount that will be taxed at 40%. Plus, any gifts given within seven years prior to your death will be subject to a sliding scale of tax according to the rules of Taper Relief.
What can I do to protect myself and my loved ones?
There are a number of steps you can take to limit your IHT liability. For example:
– With the right advice, assets can be passed legally and tax-free to your spouse or civil partner (provided both partners are UK domiciles).
– Any percentage of the estate below the IHT threshold of £325,000 that is not used upon the death of the first spouse/partner may be added to the second spouse/partners estate, meaning their threshold can double to up to £650,000.
So why leave your hard earned wealth to the taxman? Through expert estate planning, you can significantly if not totally reduce the amount of tax taken from your estate when you die.
For more information on how the Chancellor’s budget and the new Inheritance Tax rules will affect you, download our Guide to the 7 Inheritance Tax Mistakes to Avoid Following the July 2015 Budget.
If you’d like to book a free consultation with one of our legal experts, book online or call 01342 477 102 and quote ‘Inheritance Tax Blog’.
This article is for general information only and does not constitute legal advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.