If you leave more than a certain amount of money and assets when you die, you may have to pay inheritance tax. However, there are some relatively easy steps you can take to reduce your inheritance tax bill.
Who pays inheritance tax?
Under the current rules, you (or to be more accurate, your estate pay inheritance tax (IHT) if the money and assets you leave are worth more than a certain amount.
Inheritance tax is payable:
- On anything you owe that is worth more than £325,000, while money and property that you leave that’s worth less than that figure is part of your inheritance tax allowance otherwise called the ‘nil-rate band’. The IHT threshold changes from time to time, but can be found on the HM Revenue & Customs or Gov.uk websites.
SAVVY TIP: It’s not quite that simple, because you can leave as much as you want to your husband, wife or civil partner without any inheritance tax being payable.
- At a rate of 40% on the value of your assets and property above the inheritance tax threshold (sometimes called the ‘nil rate band’). If you leave behind property worth £500,000, for example, you don’t pay inheritance tax on the full amount, only on the part that’s worth more than the inheritance tax threshold.
SAVVY TIP: There are some exceptions. For example, anything that you leave to your husband or civil partner is free of inheritance tax, so they won’t pay a penny in tax, no matter how valuable the property and assets are. This includes anything you give away while you’re legally separated (but not once you’re divorced).
Married couples and inheritance tax
Not only can you give away anything to your husband, wife or civil partner without worrying about inheritance tax, but your inheritance tax allowance can be transferred to them after your death. This effectively gives married couples and those in a civil partnership much more flexibility about who they leave money and property to.
SAVVY TIP: The changes to the inheritance tax rules were introduced in 2007 and were backdated indefinitely for all widows and widowers. That means that if your husband, wife or civil partner died before October 2007, your executors can still be able to transfer their allowance and reduce the final inheritance tax bill when you die. However, they must do this within two years of your death. Contact your solicitor or accountant for more details.
Cohabiting couples and inheritance tax
If you live with your partner, but aren’t married or in a civil partnership, the inheritance tax rules aren’t nearly so generous:
- You each have your personal nil rate band or inheritance tax allowance. It is worth £325,000 in the tax year 2019-2020.
- Anything you give to your partner will be taxed. You can give money or assets that you own to your partner, but they won’t be exempt from inheritance tax.
Reducing your inheritance tax bill
If you can afford to give money away while you’re alive, you can cut your inheritance tax bill. But it’s not an option for everyone.
- Give away up to £3,000 in any one tax year.
SAVVY TIP: If you don’t give away £3,000 one year, you can give away up to £6,000 the following year, but you can’t carry it forward beyond that.
- You can give away up to £250 to anyone you like every year.
- You can give up to £1,000 to the bride and groom or both civil partners when they get married or have a civil partnership ceremony (more if you’re a relative).
SAVVY TIP: If you give away money or other assets above these limits and you live for another seven years, your partner (or whoever you give it to) won’t have to pay inheritance tax when you die. In the jargon it’s called a ‘potentially exempt transfer’.
If you don’t survive for seven years, there’s a sliding scale of inheritance tax:
- A 20% discount if you survive for 3-4 years to
- An 80% discount if you survive for 6-7 years.
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