It is important to plan ahead to ensure that when you die your estate is shared out exactly as you want it to be. This can be achieved by leaving a will. If you have complex financial affairs, you may wish to consult a solicitor or financial advisor for some help.
Inheritance tax threshold
The inheritance tax threshold (or ‘nil rate band’) is the amount up to which an estate will have no inheritance tax to pay. If the estate (including any assets held in trusts and gifts made within the seven years before death) is more than the threshold, inheritance tax will be due at 40% on the amount over the nil rate band. The current nil rate band is £325,000.
Inheritance tax exemptions
If your estate is worth more than £325,000 there are some inheritance tax exemptions, which allow you to make gifts to others during your lifetime, and not have to pay tax on them when you die.
You could make use of your ‘annual exemption’, which allows you to give away gifts worth up to £3,000 in total in each tax year – these gifts will be exempt from inheritance tax when you die. You can carry forward any unused part of the £3,000 exemption to the following year.
You can also make small gifts up to the value of £250 to as many individuals as you like in any one tax year, although you cannot use your small gifts allowance together with another exemption when giving to the same person.
In addition, any gifts you make to your children will be exempt from inheritance tax as long as you live for seven years after making the gift. If you die within seven years and the gift is valued at more than the nil rate band, inheritance tax will need to be paid on it, either by the recipient of the gift or the representatives of your estate.
However, if you die between three and seven years of making the gift and its value is over the nil rate band, the gift attracts ‘taper relief’, which reduces any inheritance tax due on it on a sliding scale.
Giving your home away
If you give your home to your children but continue to live there it will not be exempt from inheritance tax, even if you live for seven years afterwards. However, if you sell your home and give the money to your children, the gift won’t be included in your estate for inheritance tax purposes provided you live for seven years.
If you and your spouse/civil partner own your home as joint tenants, the surviving spouse/partner will automatically inherit the property when you die. However, if you own a property as tenants in common with another person, you can pass your portion onto your children when you die. This may reduce the future size of the taxable estate when your surviving spouse dies. If your estate is worth more than the nil rate band, you may wish to consult a solicitor to discuss the implications of changing the way you own your home.
You may be able to claim special relief for passing on the particular assets, such as business assets or agricultural property.
Trusts and inheritance tax
If your children aren’t immediately able to look after their own affairs, you can use a trust to pass assets on to them. However, gifts into a trust may still be subject to inheritance tax if the size of your estate, including the amount being transferred, is over £325,000. Trusts are complicated, so it is advisable to seek professional help.
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