Inheritance Tax is the money paid on the balance of your estate above a certain threshold.
You are currently able to leave an estate worth up to £325,000 without paying any inheritance tax. Above this sum – known as the ‘nil rate band’ – the tax is charged at 40%. It is usually paid out of the deceased’s estate by the executor of the will.
£325,000 sounds like a lot of money, but once you’ve added up the value of your house, car, savings and possessions, your estate could be worth well over that amount. It is worth calculating what your estate is worth and taking steps to reduce your liability.
There are ways to avoid paying it altogether, or to reduce the amount you are liable for, and an independent financial advisor can help you organise your financial affairs to do this.
No tax is due between spouses or registered civil partners if they both have UK domicile.
A surviving husband/wife/partner can also benefit from any remaining nil rate band from their deceased partner, which means they can leave more than £325,000 free of tax.
To lower your tax liability you can gift money to other people during your lifetime – for example you can gift £3,000 a year to whoever you like or give money to children or grandchildren on marriage.
If you give away more than £300,000 during your lifetime, there is a ‘seven year rule’ which states that if you die within seven years of giving the money, it will be subject to inheritance tax. It is charged at different rates, depending on how soon after making the gift you die. If you die within three years, for example, the tax will be charged at 100% - or 40% of the value of the gift.
You can also put money, property or shares into trust for others to keep it exempt from the tax. This is a good way of leaving money for children or grandchildren and ensuring they only have access to it from a certain age. You have to appoint trustees who will look after the money and follow certain rules you have set down about how the money can be invested, spent and so on.