Inheritance tax explained by Interactive Investor expert
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Inheritance Tax is a tax paid on an estate of someone who has died. The estate of a person includes their property, money and possessions. The threshold, or nil rate band, at which families pay Inheritance Tax has been held at £325,000 since 2009. The Chancellor announced in his Spring Statement that the rate will continue to remain frozen until 2026.Anything above the £325,000 threshold will then be taxed at a rate of 40 percent, so for every £100,000 of taxable wealth, £40,000 will go into Inheritance Tax.
This threshold also applies to every individual.
If the estate is below the £325,000 threshold then a person will not have to pay any inheritance tax on it.
However, if this is the case the estate still needs to be reported to HM Revenue and Customs (HMRC).
A person’s home is likely to be the most expensive asset to their estate but the rules state that there is no tax to pay if an individual passes a home to their husband, wife or civil partner when they die.
By doing this a person can reduce their estate’s value meaning that they can reduce the inheritance tax they owe.
Another instance where no tax is paid is when a deceased person has left everything in their estate that is above the threshold to their spouse, civil partner, a charity, or community amateur sports club.
There are ways in which a person can increase their threshold with one useful tip being the residence nil rate band, although it has a few more criteria to be met.
The residence nil rate band provides £175,000 tax free towards the value of a home left in one’s will.
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The home would need to be given to direct descendants of the deceased person such as children, grandchildren or children who the deceased was appointed guardian of when they were under 18 years old.
Children who are adopted or fostered are also eligible in the criteria.
If an estate and the deceased meet all of the qualifying conditions for the relief, their total inheritance tax relief could be £500,000.
However, the relief does not apply just to the value of the property but rather to the full estate if it qualifies.
Another possible way is if a deceased person’s estate has not reached the £325,000 threshold, then the unused amount left can be transferred to their husband, wife or civil partner.
This means that the surviving partner can receive a threshold of as much as £950,000.
A way that a person can decrease their rate of tax paid is by giving 10 percent of their estate to charity.
This will reduce the amount from 40 percent down to 36 percent.
Britons are told that to take advantage of these almost loopholes in the inheritance tax system then they must plan ahead.
Gifts made more than seven years before a person’s death are also not included in the inheritance tax calculations. So the sooner a person starts giving away their money and assets the better.
According to the rules, each year Britons also have an annual allowance of £3,000 which they can give away as gifts without having to worry about the tax burden.
Experts state that the best way to approach and manage inheritance tax is for a person to first analyse their assets and their worth, and then make a detailed will.
Making a detailed will which explains clearly and exactly what a deceased wants to do with their estate can help the family who has been left, not just financially but will also make it an easier process for them to go through.
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