Only around 5% of estates in the UK are liable for inheritance tax before being distributed to any beneficiaries or causes.
That may sound like very few, but it should have been a key consideration for around 24,500 estates that had it deducted in 2015/16.
Those estates had an average of £179,000 deducted in inheritance tax before what remained could be handed out.
It’s been said over and over again that inheritance tax is overly complex, despite so few estates actually being subjected to it.
Dig a little deeper and you will find that the number of liable estates increased by 57% between 2010/11 and 2015/16.
That trend looks set to continue in the coming years. So let’s recap on what inheritance tax is and how you can reduce what your estate has to pay.
What is inheritance tax?
Inheritance tax in 2019/20 continues to apply at 40% on a person’s estate worth more than £325,000.
In practice, your estate – which includes any properties, investment, money or possessions – can only be taxed at 40% if it exceeds this threshold.
The £325,000 threshold, known as the nil-rate band, can be transferred between spouses or civil partners.
If your spouse or civil partner does not use this threshold when they die, it’s possible to double the tax-free threshold on your estate to £650.000.
Ways to reduce inheritance tax
Broadly speaking, you can reduce the value of your estate by giving away assets, changing your will, or setting up a trust.
Gifts to your spouse or civil partner
Spouses or civil partners can usually give away anything to their partner without paying inheritance tax on what the gift is worth.
Different rules apply if your spouse or civil partner was either born or has their permanent home outside of the UK. Speak to us if this applies to you.
Gifts to family or friends
Gifts to members of your family or friends will be included in the value of your estate for inheritance tax if you die within seven years of making it.
The rate of inheritance tax on the gift depends on when you die within those seven years as the following taper relief applies:
|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||Nil|
If you live for seven or more years after making the gift to family or friends other than your spouse or civil partner, it will not be taxed.
Exempted gifts of up to £3,000 can be given away each year, while £1,000 can go towards a wedding or civil partnership ceremony.
Gifts made to charity are an effective inheritance tax planning tool to reduce the value of your estate.
Leaving 10% of the total value of your estate will reduce the inheritance tax rate from 40% to 36%.
This can be a good way to benefit any causes close to your heart. It can also ensure any family or friends receive more than if inheritance tax is charged at 40%.
Setting up a trust
Placing any of your assets into a trust will no longer be part of your estate for inheritance tax purposes.
The rules on trusts are complicated, and different taxes may come into play if you transfer certain assets into trust over the course of your life.
Navigating the complexities of inheritance tax is forms a large part of our personal tax service.
For expert help with all aspects of planning your estate, contact us on firstname.lastname@example.org or call 01363 773191.