When you set up your estate or draw up a will, you need to make sure your loved ones do not pay a sizable tax. This tax is assessed on a person’s inheritance. Therefore, it is helpful to know how to avert this tax for your loved ones.
Review Your Options
One way to do this is to consult with inheritance tax lawyers about your options in this respect. They can give you full details about what you can do to gift your loved ones so they don’t have to pay a tax. An inheritance tax, as the name suggests, is a tax that is levied on a decedent’s estate. This tax allows the HMRC to acquire a part of a deceased’s possessions, money, and property.
This tax comes due when a person dies, or may even be assessed when the person is still alive. With that being said, you don’t have to pay an inheritance tax in certain situations. For example, if the deceased has left his or her spouse or partners the whole estate, no tax is due. The tax will not fall on an estate either if the entire estate is worth under £325,000 or £650,000 (for married couples).
Leaving Your Estate to a Charity
Inheritance taxes also do not apply if the estate is left to an entity or person who is exempt from an inheritance tax. In this situation, a tax is not due when an estate is given to a charity, national institution, such as a museum, or a political party.
If you gift someone with property or money when you are alive, it may be exempt from an inheritance tax too, provided it complies to HMRC rules. It is important what items can be counted as being taxed and what belongings or cash does not need to be taxed, as the tax rate is sizable. Currently, the UK inheritance tax is 40%. This rate is applied to any part of the estate above the tax-free limit.
For instance, suppose a decedent leaves an estate that is valued at £500,000. The first £325,000 would not be taxed. However, the recipient would have to pay a tax on the remaining amount, or £175,000. Therefore, the amount paid would be 40% of £175,000, or £70,000. Therefore, £70,000 would go to HMRC.
Taking a Home Allowance
When you speak to inheritance tax professionals, you can find ways to minimise the inheritance tax and lessen the burdens for your loved ones after you die. For example, you can increase the inheritance threshold by taking a home allowance. This allowance permits you to decrease the amount of the inheritance tax by leaving you home to your children (biological and adopted), grandchildren, or children under your guardianship.
The home allowance is currently set at £150,000, and will increase by £25,000 in 2020 and 2021. In 2022, it will adjust to the consumer price index. If you include a £150,000 allowance in 2019, and add it to the tax threshold of £325,000, your children do not pay taxes on your estate, worth up to £475,000.
Also, be aware, this home appliance is only applicable if your entire estate is worth £2 million. You can’t benefit from this allowance if your estate is valued at £2.25 million, or anything over this amount.