Overview
Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died.
There’s normally no Inheritance Tax to pay if either:
➢ the value of your estate is below the £325,000 threshold
➢ you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club
➢ Notify to HMRC if estate is below threshold value
➢ Transfer of home to your children (including adopted, foster or stepchildren) or grandchildren your threshold can increase to £500,000.
Inheritance Tax rates
The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the threshold. The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will. This is done by the person dealing with the estate (called the ‘executor’, if there’s a will).
Passing on a home
You can pass a home to your husband, wife or civil partner when you die. There’s no Inheritance Tax to pay if you do this. If you leave the home to another person in your will, it counts towards the value of the estate.
If you own your home (or a share in it) your tax-free threshold can increase to £500,000 if:
➢ you leave it to your children (including adopted, foster or stepchildren) or grandchildren
➢ your estate is worth less than £2 million
Gifts
There’s usually no Inheritance Tax to pay on small gifts you make out of your normal income, such as Christmas or birthday presents. These are known as ‘exempted gifts’. There’s also no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime, as long as they live in the UK permanently. Other gifts count towards the value of your estate.
People you give gifts to will be charged Inheritance Tax if you give away more than £325,000 in the 7 years before your death.
What counts as a gift
A gift can be:
➢ anything that has a value, such as money, property, possessions
➢ a loss in value when something’s transferred, for example if you sell your house to your child for less than it’s worth, the difference in value counts as a gift
Exempted gifts
You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’.
You can carry any unused annual exemption forward to the next year – but only for one year.
Each tax year, you can also give away:
➢ wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)
➢ normal gifts out of your income, for example Christmas or birthday presents – you must be able to maintain your standard of living after making the gift
➢ payments to help with another person’s living costs, such as an elderly relative or a child under 18
➢ gifts to charities and political parties
Small gifts up to £250
You can give as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption on the same person.
The 7 year rule
If there’s Inheritance Tax to pay, it’s charged at 40% on gifts given in the 3 years before you die.
Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.
Years between gift and death Tax paid
less than 3 40%
3 to 4 32%
4 to 5 24%
5 to 6 16%
6 to 7 8%
7 or more 0%
When someone living outside the UK dies
If your permanent home (‘domicile’) is abroad, Inheritance Tax is only paid on your UK assets,
for example property or bank accounts you have in the UK.
It’s not paid on ‘excluded assets’ like:
➢ foreign currency accounts with a bank or the Post Office
➢ overseas pensions
➢ holdings in authorised unit trusts and open-ended investment companies
There are different rules if you have assets in a trust or government gilts, or you’re a member of visiting armed forces.
Contact the Inheritance Tax and probate helpline if you’re not sure whether your assets are excluded.
When you will not count as living abroad
HMRC will treat you as being domiciled in the UK if you either:
➢ lived in the UK for 15 of the last 20 years
➢ had your permanent home in the UK at any time in the last 3 years of your life
✓ Should you wish to speak with Us in relation to above feel free to contact us