A Kwaetus Guide to Inheritance Tax
When a loved one dies, the last thing we want to think about is our taxes and paperwork but at some point, the liability of inheritance tax may need to be considered. This guide takes you through all you need to know about inheritance tax to give you a better understanding of what is involved and the effects it may have on you or your loved ones.
What is inheritance tax?
Inheritance tax was first introduced as a tax for the wealthy, but this is no longer the case, therefore, the possibility of inheritance tax needs careful consideration by all inheritors as it is the transferring of certain assets from one person to another that collects the cost of tax.
The main purpose of inheritance tax is for the government to gain revenue from the deceased’s estate.
To understand more about what is meant by ‘estate’, please check out A Kwaetus Guide to Probate.
Who must pay inheritance tax?
If the deceased’s estate, of which has been inherited, is valued to be worth above the threshold of £325,000, the inheritor will most likely be expected to pay inheritance tax.
Many inheritors regard inheritance tax as a voluntary tax because there are different ways assets can be structured to relieve the liability of inheritance tax. We’ll take a look at this later on in this guide.
How much is inheritance tax?
The set rate for inheritance tax is 40% on all assets valued above the threshold or, also known as, the Nil Rate Band (NRB). So, any assets worth over £325,000 will attract the 40% inheritance tax.
However, the NRB can be increased to £425,000 due to the Residential Nil Rate Band (RNRB) but only if the inheritor or inheritors are the children or surviving spouse of the deceased, this includes fostered, adopted or stepchildren or a civil partner.
Furthermore, if the deceased’s NRB percentage allowance is not fully used, the surviving spouse or civil partner can add the remaining percentage to their own NRB allowance.
What are inheritance tax gifts?
Inheritance tax gifts are assets that you give away to family, friends and charity that may be inheritance tax exempt. It is a good idea to organise who gets what assets upon your death in your Will to avoid any unnecessary inheritance tax being paid. Kwaetus is the perfect space for delegating your assets to the right people and it is free until you’re ready to make it official, click here to get signed up now.
For extra guidance on how to write a Will we have put together Kwaetus’ Guide to Making a Will to support you through every step of the process.
How can inheritance tax be avoided?
The good news is there are lots of ways to either avoid or reduce the amount of inheritance tax you must pay on your assets. Here are 11 different ways you can do this:
- Make gifts to your spouse or civil partner before you die or upon death:
This can get complicated if your spouse or partner were born or permanently live outside of the UK. In this case, the best advice we can offer is to seek professional advice. Kwaetus can connect you with an estate planning specialist, get in touch with us for further information.
- Give assets to family and friends:
You can gift anyone with an asset while you are alive as long as you will not benefit from it. For example, if you gift someone the ownership of your business, you cannot receive any of that business’s future profits or if you gift someone a house and they sell it, you cannot gain from the profits made on its sale.
- Leave assets to charity:
If you leave all your estate to charity, there will be no inheritance tax to pay. Or, you could leave a portion to charity and the rest to family and friends. By donating 10% or more of your assets to charity upon death, the rate of inheritance tax will be reduced on your remaining assets from 40% to 36%. Plus, if you decide to bequeath £1000 or more to a charity of your choice through your Kwaetus account, we’ll gift you your first year’s subscription with us for free. Ready to make this choice now? Create your Kwaetus account.
- Take out life insurance:
While taking out a life insurance policy will not directly reduce the rate of inheritance tax, it will make it easier for your loved ones to pay it. For example, the payout that your loved ones will receive from the life insurance policy can be used to pay the inheritance tax bill instead of having to sell the family home to cover the cost.
- Set up a trust:
Setting up a trust can potentially help avoid paying inheritance tax on property. This is because a trust is a legal arrangement that allows the gifting of assets to another person to take care of on behalf of a third party. For example, opening a trust fund for a child and allowing another family member or friend to take care of the trust. The child would be the beneficiary and the caretaker would the trustee- the one that owns and manages it. Once you have put assets into the trust, the assets will no longer belong to you, therefore, no inheritance tax should be due.
- Utilise your business owner exemptions:
As a business owner, you can transfer the interest to a friend, family member, or business partner without having to pay any inheritance tax. This can be done before or upon death.
- Transfer agricultural land and/or buildings:
Giving away your agricultural land and/or buildings to a family member or friend should help to not attract any inheritance tax.
- Give a generous wedding gift:
You can gift your daughter or son up to £5,000, £2,500 per grandchild, or £1,000 per friend as a wedding present inheritance tax-free. If you want, you can leave a note on your Will confirming that they have already received their inheritance so they cannot put a claim in for more once you are deceased. This can be done on your Kwaetus account, click here to get started.
- Go on a spending spree:
You only live once, and you’ve worked hard all your life so why not treat yourself and your loved ones while you’re still alive? How about that holiday of a lifetime or all those experiences you’ve always wanted to do? Make some great memories that will stay with your loved ones forever.
- Give small gifts:
Make use of the small gift exemption that allows you to give £250 to anyone every year inheritance tax-free. There are no limits as to how many people you gift up to £250 in any one tax year. The only restriction is one per person per year.
- Plan your funeral:
Buy a pre-paid funeral plan, the money spent on your funeral cannot be counted towards any inheritance tax.
Not sure how to plan a funeral? Take a look at Kwaetus’ Guide to Planning a Funeral.
It is important you have a Will in place to avoid paying inheritance tax. Why not take a moment now to sign up for Kwaetus’ Free Trial to see how easy creating a Will or letter of wishes really is?
For the more complex Wills, Kwaetus can connect you with local and professional Will writers, email us for further information.