inheritance tax


When someone we love passes away, money is usually the furthest thing from our minds, but as with anything in life, there are inevitable financial matters that must be considered. And the fact is that as much as it isn’t pleasant to dwell on our impending death, most of us will take time to put measures in place – from life insurance to funeral planning – to ensure the financial aspects of death can be swiftly and easily dealt with once the time comes, saving our nearest and dearest any additional grief.


However, it remains a sad fact that the majority of people putting plans in place for a future without them in it do not go far enough, making many assumptions regarding the complex matter of inheritance, particularly if they’re married or in a civil partnership.


But proper planning in life, along with the guidance of an appropriate advisor skilled at navigating these complexities, can help to ensure those left dealing with your estate don’t face any unexpected surprises, as inheritance tax can amount to many thousands of pounds.


The present is a gift

As we covered in our first blog on this topic, inheritance tax at a standard rate of 40 per cent is payable on the value of any assets above the basic threshold of £325,000, but that tax-free threshold can be pushed higher by certain strategies, such as gifting assets through a will.


We touched upon the fact that many people incorrectly assume they don’t need a will because their assets will automatically pass to their spouse, but in truth, the rules of intestacy are, like everything to do with inheritance, more complex than that, and only through making a will can you ensure your estate will benefit those you intend it to. For example, without a will, if you’re unmarried, legally separated or cohabiting, your partner can’t inherit anything they don’t jointly own.


Under inheritance tax rules, some gifts attract relief from inheritance tax and some are exempt from it. Most gifts to individuals are potentially exempt transfers, meaning they won’t be liable to inheritance tax upon death if you live for at least seven years following the gift, and if you’re married or have a civil partner, you can gift tax-free assets to your spouse both during life and on death. This exemption is responsible for removing a large proportion of estates from the inheritance tax charge, and is of major importance in tax and estate planning. Remember – a cohabitee is not entitled to this spouse or civil partner exemption.


A spouse or civil partner will also automatically inherit the deceased’s share of a property if they owned it as joint tenants and there’ll be no inheritance tax if they continue to live in it. If they owned the house as tenants in common, each can also pass their share of the house to anyone else.


The following gifts made during a person’s lifetime are exempt from inheritance tax:

  • an annual lump sum to an individual of £3,000, which can be carried forward for up to a year
  • up to £5,000 made to a child in the event of their wedding or civil partnership
  • up to £2,500 made to a grandchild in the event of their wedding or civil partnership
  • up to £1,000 made to anyone else in the event of their wedding or civil partnership
  • up to £250, unless the same person has already received more than that sum from you in the same year
  • contributions to charities, museums, universities, community amateur sports clubs and political parties.


Where an individual regularly makes gifts to, say, family members out of their surplus income, there will also be no inheritance tax as long as the individual has enough money to maintain their normal lifestyle.


What about property?

Giving away property during your lifetime may be the best form of planning for inheritance tax, as if you gift your home to someone at least seven years before death, it will be classed as a potentially exempt transfer, and no tax will apply. An important caveat to this however is if you continue to live in the property rent-free, this breaks a rule called reservation of benefits. To qualify for the full tax exemption, you can only visit the home for short stays once the gift has been made. Either that or, to protect the exemption, you must pay a market-value rental.


Your home can also be classed as a potentially exempt transfer if you sell it and gift the proceeds. However, another caveat is if children who’ve received these proceeds go on to buy a new property that you then live in, it will be classified a pre-owned asset that will be subject to income tax.


These are just some of the considerations and rules that can help you minimise the inheritance tax liability of your estate, and tax rules are updated frequently by Government, so it pays to consult with a qualified professional with expertise around all the issues.


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