Inheritance Tax is simply a tax on the estate of someone who has died. An estate includes someone’s money, personal possessions, property and any other assets such as shares, cryptocurrency and vehicles. The standard Inheritance Tax rate is currently 40%, which is charged on anything above £325,000 (the standard threshold amount).
Only 1 in 20 estates in the UK need to pay Inheritance Tax – but how do you know if you’re one of them? We take a look at when you need to pay Inheritance Tax, when you don’t need to pay it and some legal ways to reduce your Inheritance Tax bill or avoid it altogether.
How do I know if I’m exempt from paying Inheritance Tax?
There are several ways you can determine whether or not you or the beneficiaries of your estate need to pay Inheritance Tax. The current threshold for paying Inheritance Tax is £325,000. But if you decide to give your home to your children or grandchildren, this threshold can jump up to £500,000, meaning your loved ones will pay less inheritance tax if applicable.
In most cases, if you’re planning to leave everything to your spouse or civil partner, or if you leave everything to an exempt beneficiary, you won’t need to pay any Inheritance Tax.
Are there any ways to avoid paying Inheritance Tax in general?
There are ways you can reduce, if not completely avoid, paying Inheritance Tax.
We’ve outlined some of the methods of reducing your Inheritance Tax bill in the table below, along with some of the conditions you may need to meet:
|Method||Inheritance Tax Rate||Conditions|
|Make gifts of up to £3,000 per year||0%||Sometimes known as the annual gift allowance, you can make gifts totaling up to £3,000 per year and these are not taken into account when calculating any inheritance tax due in your estate. It’s advisable to keep a record of any such gifts.|
|Give cash as a wedding gift to certain family members||0%||Parents can give their children up to £5,000 tax-free. Grandparents can give up to £2,500 tax-free. Other friends and relatives can gift up to £1,000 tax-free. Again, you should keep a record of these gifts.|
|Make gifts and survive for seven years afterwards
(known as a Potentially Exempt Transfer or “PET”)
|0% to 40%||You can make gifts of any amount during your lifetime and inheritance tax will not be payable on them if you live for a further seven years. If you die within seven years of making such a gift, inheritance tax will become payable on a sliding scale, such that less tax is payable the longer you survive.
It is important to keep a record of these gifts.
|Pass on your property before you die||0% (subject to requirements)||If you want to continue living at the property after you pass ownership to a loved one, you will need to:
You don’t have to pay rent if you’ve only given away part of the property or if the new owners live at the property.
|Pass on your property after you die||0% (subject to requirements)||In most cases, Inheritance Tax isn’t payable on a property passed to your spouse (husband, wife or civil partner) in your will.
If you leave your property to your children or grandchildren, this can increase your Inheritance Tax threshold to £500,000, so inheritance tax is only payable if the value of your estate is above £500,000.
|Put assets into a trust for your beneficiaries||0% (if all conditions are met)||Please note that trust law is becoming increasingly complex and, without specialist advice, you can find yourself paying more tax rather than less. If considering a trust, you should speak to us to make sure you avoid any unwanted outcomes.|
|Pay into a pension||0%||Some pension schemes are set up so that your pension fund falls outside of your estate and doesn’t become subject to Inheritance Tax.|
|Leave a gift to charity in your Will||0%||Gifts to charity are deducted from the value of the estate before Inheritance Tax is calculated, so inheritance tax is not payable on them.
If you leave 10% or more of your net estate to charity, the Inheritance Tax rate will be reduced from 40% to 36% on the rest of your taxable estate.
What are the penalties for not paying Inheritance Tax?
If you don’t pay Inheritance Tax when required to do so, you could be liable for certain penalties. Missing an Inheritance Tax deadline, for example, means you will have to pay interest on the amount owed. There are also penalties ranging from £100 to over £3,000 for late payment of Inheritance Tax.
A penalty can also be imposed if any information provided is inaccurate. The level of the penalty depends on the type of mistake made (i.e: genuine human error, carelessness, deliberate, concealed and so on). The highest penalty that can be given for inaccurate information is 100% of the tax due, as well as the tax amount itself.
While our blogs shouldn’t be construed as a replacement for actual legal advice, our team can certainly help you. Please contact our Private Client team for legal help and advice: