What is Inheritance Tax?
Having worked hard all your life, paid your taxes, and built up your savings, you want to pass on your estate to your family when you have gone. You may be unhappy to learn that there is a potential threat to this plan – inheritance tax.
Inheritance tax is a tax that many people don’t think about and assume it’s something that only affects the rich. However, as the value of homes have risen so much over the last few years it’s now something that affects thousands of families.
The current starting point from when you have to pay inheritance tax is £325,000. This is commonly known as the ‘nil rate band’. Everything you own over and above this amount is potentially subject to 40% tax when you die.
Will I have to pay?
The first thing you need to do is to roughly work out whether your estate is currently worth over £325,000. Many people underestimate just how much their estate is actually worth. Remember that your ‘estate’ often includes everything you own – property, cars, personal belongings, any investments, savings and insurance policies.
Don’t forget that this amount will change over time. Your property may increase in value over the next few years which could make any inheritance tax problem worse and your investments may fluctuate. So even if at the moment you are just below the £325,000 threshold, you could find yourself liable in the future. It’s worth regularly keeping an eye on what your estate’s worth.
If your taxable estate is worth more than £325,000 don’t panic – there are many options open to you to help reduce this liability or even eliminate it altogether. The next section will go through a few of them.
What if I do nothing?
Inheritance tax is often called the ‘voluntary tax’ as with good advice and careful planning it can be reduced or avoided altogether. The amount to be paid is largely decided by the actions you take before you die. So it’s important that you take steps now to protect your estate and reduce the share that the taxman takes.
If you don’t do anything the taxman could get a large slice of your estate. The table below shows just what a large slice he might get!
Years between date of gift & death % of full rate payable
0- 3 years 100%
4 – 5 years 80%
3 – 4 years 60&
5 – 6 years 40%
6 – 7 years 20%
More than 7 years No tax to pay
If you do have a potential liability, your beneficiaries will usually have to pay this before your estate is released. This may mean they have to borrow to pay the tax. They may then have to sell your home to repay the loan needed to fund your tax bill.