Inheritance tax explained by Interactive Investor expert
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Some £4.6billion was paid to the Government between April and December 2021 in inheritance tax, Her Majesty’s Revenue and Customs (HMRC) data shows. People do not have to pay tax on an estate as long as it is passed to the spouse or civil partner of the person who died, a charity or if its value is below the inheritance tax threshold of £325,000.
There’s also a residence nil-rate band if the home of the person who has died is being left to their children or grandchildren.
This means an individual can pass on assets up to the value of their nil-rate band without having to pay inheritance tax.
Heirs are required to pay tax out of the estate on its value above this threshold, currently at a rate of 40 percent.
This rate is only charged on the part of the estate that’s above the threshold.
The threshold is set at £325,000 and it will remain fixed at this amount until April 2026.
People can pay inheritance tax at a reduced rate of 36 percent on some assets.
This is only possible if they leave 10 percent or more of the net value to charity in their will.
People who make gifts during their lifetime that aren’t covered by your tax-free gift allowances and then die within seven years of making the gifts, may have a smaller nil-rate band on their death.
The value of these gifts will reduce or eliminate their nil-rate band, meaning that less of their estate will be passed on tax-free.
Any unused nil-rate band is transferred to a surviving spouse or civil partner.
It will also be available when a person downsizes or ceases to own a home and assets of an equivalent value (up to the value of the additional nil-rate band) are passed on death to direct descendants.
If a home is held in a discretionary trust, it would not normally form part of a person’s estate.
In these circumstances, the estate would not be eligible for the residence nil-rate band even if the home goes to the beneficiary’s direct descendants when the beneficiary dies.
If couples pool their nil-rate bands they can, effectively, leave £650,000 of assets to heirs without paying any inheritance tax.
But a person’s home is treated differently.
People can receive an additional main residence band covering their home which raises the total nil-rate band for some to £500,000, and so to £1million for couples.
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Giving away a home to children (including adopted, foster or stepchildren) or grandchildren increases the inheritance tax threshold to £500,000.
There was a particularly lower number of IHT receipts between April and May 2020.
This was due to a temporary issue where HMRC was unable to accept cheques for payment of IHT due to the COVID-19 pandemic.
This was then resolved, leading to a spike in inheritance tax receipts during the summer of 2020.
Also, a high number of IHT receipts in October 2020, November 2020 and March to August 2021 could be attributed to an accelerated volume of wealth transfers that took place during the COVID-19 pandemic.
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