Estate Duty, Capital Transfer Tax and now Inheritance Tax; some form of death tax has existed in the UK since the 19th Century and has since developed into something quite complex.
Whilst it’s possible for Inheritance Tax to be charged on transfers of assets during a lifetime, it mostly arises on death.
Inheritance Tax is charged on the value of someone’s estate when they die. The value is calculated by adding all assets together and deducting any liabilities. The assets will be anything to which the deceased was beneficially entitled, including their own assets, their share of jointly held assets and assets held in trust.
Exemptions, allowances and/or reliefs are then applied to give the taxable estate. The tax is levied at 40%, although a lower rate of 36% is available, where 10% of the gross estate is left to charity.
The Inheritance Tax threshold is currently £325,000 for individuals. If your estate, after you’ve added together assets and deducted liabilities, is over £325,000, there could be an Inheritance Tax bill on your death. Inheritance Tax is charged at 40% on everything over that amount.
Transfers between spouses/civil partners are exempt from Inheritance Tax. You can inherit your spouse’s £325,000 allowance provided they’ve not already used it up (by making gifts to non-exempt beneficiaries or other lifetime gifts). Where spouses leave everything to each other, when the survivor dies, they can leave up to £650,000 without paying Inheritance Tax.
The Residence Nil-Rate Band allowance (which is complex, limited to certain circumstances and tightly linked to property ownership) could increase your £325,000 threshold by a further £175,000. You can inherit this additional allowance from your spouse too. Gifts to charities and some political parties are also exempt from Inheritance Tax.
The exemption for Soldiers who die in the line of duty, contained in the Inheritance Tax Act 1984, can also be used for emergency personnel/front-line workers if they die due to COVID-19.
Considering your tax position is only one aspect of will planning, you’ll inevitably have other priorities to consider, which are no less important.
Seeking the right advice early on will help you to achieve what is right for you in the most taxefficient way. After all, no one wants to leave everything to the taxman!