Will I have to pay Inheritance Tax?

23/04/19

This is a question I am often asked and by people who will never have to pay inheritance tax.

Each individual has a tax-free Inheritance tax allowance of £325,000 which means money or possessions up to this amount can be passed on tax free (subject to certain exemptions). Anything over this will be taxed at 40%.

 

Gifts made in the last years before you die could also be subject to inheritance tax.

 

To best illustrate this here area some examples:

 

Example 1

Sid is a bachelor. He now rents after having sold his home for £330,000 and has no savings. On his death he passes everything to his niece, Lauren.

Total Estate: £330,000

Less funeral costs: £5,000

Net Estate for tax: £325,000

Less IHT allowance: £325,000

Total to be taxed: £0

 

Consider though if Sid’s house was worth £400,000.

Example 2 - the same facts

Sid is a bachelor. He now rents after having sold his home for £400,000 and has no savings. On his death he passes everything to his niece, Lauren.

Total Estate: £400,000

Less funeral costs: £5,000

Net Estate for tax: £395,000

Less IHT allowance: £325,000

£70,000 @ 40% = £28,000 

 

Sid may want to consider taking legal advice about his inheritance tax planning options to mitigate his inheritance tax bill.

Married couples and civil partners are allowed to pass their assets to each other tax-free. Any unused Inheritance Tax allowance can also be transferred to each other.

 

So if on death of Husband his assets are passed to his Wife this will be tax free. His IHT allowance of £325,000 is unused and can be transferred to his Wife. Assuming Wife has a £325,000 allowance then this can be added to her Husband’s £325,000 meaning that on her death she has a £650,000 allowance which means she can pass this amount on to the next generation without being liable for Inheritance tax.

 

Example 1

Beverley and Stuart are married. Beverley owns the couple’s house worth £300,000 and has her own investments worth £200,000. On Beverley’s death she passes everything to her husband, Stuart.

Total Estate: £500,000

Less funeral costs: £5,000

Amount passed to Husband: £495,000

Amount exempt from IHT because inherited by Spouse: £495,000

Total value of estate to be taxed: £0

 

Following on from the facts above, on Stuart’s death he can combine his Wife’s allowance with his own to make £650,000 (£325,000 x 2). Stuart now has £495,000 inherited from his wife plus £130,000 of his own money. This is passed on to his son, James.


Total Estate: £625,000

Less funeral costs: £5,000

Net Estate: £620,000

Combined IHT allowance available: £625,000

Total value of estate to be taxed: £0

 

 

These are relatively simplistic examples and assumes there is no family home so the residence nil rate band allowance is not available. Please get in touch if you have any inheritance tax queries.

 

 

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