Inheritance tax has always been a political bone of contention in the UK, primarily because this is often paid out of income that has already been subjected to national insurance contributions and income tax levies.
Whilst various governments have discussed abolishing or significantly reforming inheritance tax (IHT), however, for now this remains a prominent tax law that continues to impact on financial estates throughout the UK. In fact, it’s estimated that the value of IHT in the UK will rise to £5.3 billion by April 2020, and this undoubtedly represents a huge sum of money by anyone’s standards.
With this in mind, we’ve prepared a brief guide on inheritance tax and what you need to know when dealing with this piece of legislation.
What is IHT and its Current Thresholds?
In simple terms, IHT refers to a tax that’s placed on the estate of a British citizen who has passed away.
This type of financial estate typically includes a range of tangible assets, including cash holdings, property and possessions.
However, British law currently stipulates that you won’t pay IHT in instances where the value of your estate is below £325,000. The same rule also applies in instances where you leave everything above this threshold to your spouse or civil partner, and this is another key consideration when engaging in estate planning.
You can also avoid paying any IHT on the value of your estate if you leave everything above the minimum thresholds to a tax-exempt beneficiary such as charity.
In instances where your estate is worth more than £325,000 and you fail to meet any of the criteria listed above, you may ultimately be liable to pay IHT at a fixed rate of 40%. So, although only 4 to 5% of estates in the UK pay IHT in the UK, the value of these levies are worth huge amounts of cash to the government.
What are IHT Gifts, Reliefs and Exemptions?
The question that remains, of course, is can estate holders seek out additional ways of legally avoiding IHT or reducing their liability?
It’s interesting to note that some gifts and property may be exempt from IHT, including those offered as wedding gifts or charitable donations.
Further relief may also be made available on certain types of property, including farms and those that are categorized as business assets.
Beyond this, the law also stipulates that estate holders who offer gifts in the seven-year period prior to their death will see these assets included as part of their taxable estate. However, if these gifts are proffered more than seven years before their death, they won’t be required to pay tax on them.
These options all represent ways of reducing the on your estate, but the complexity of this process means that you need to develop a viable strategy to achieve this objective.
You may want to consider giving away relatively small and manageable gifts of up to £3,000 per annum, for example, or paying capital directly into a pension fund rather than a standard savings account.
Article Submitted By Community Writer