Inheritance tax (IHT) is a tax on money or possessions you leave behind when you die, and on some gifts you make during your lifetime.
However, a certain amount can be passed on tax-free; this tax-free allowance is officially called the ‘nil-rate band’.
If your estate is worth more than 325,000 pounds when you die, your heirs will have to pay inheritance tax on everything over that amount. But they’ll pay nothing, if your estate totals less than that. Your estate includes your property, savings, and any other assets you pass on after debts and funeral expenses have been paid.
And the tax rate is 40%. But if your estate is entirely inherited by your spouse or civil partner, they don’t have to pay any inheritance tax. Anything after the 325,000 pound figure is called the nil-rate band. And the figure is attached to the estate of the person who dies, rather than to the people who inherit.
The nil-rate band can be passed on to a surviving spouse or civil partner. And they can add it to their own nil-rate band. Meaning that when they die, they can leave an estate worth 650,000 pounds, that’s free of inheritance tax. So what happens if you give away money and property while you’re still alive? You can make gifts of up to 3000 pounds in any tax year, without worrying about inheritance tax.
And you can give far more tax free, as long as you live for seven years after you’ve made the gift. But if you die within seven years of making it, HMRC will treat it as part of your estate. So how much tax will be due? Inheritance tax is due only on anything above the 325,000 pound threshold.
It’s normally 40%, but it’s cut to 36%, if you give away a tenth of your estate to charity. Lastly, there’s something else that’s worth knowing. From 2017, there’s going to be an extra allowance covering the value of your main home, starting at 100,000 pounds, but rising to 175,000 pounds per person by 2020.
Combined with a normal nil-rate band, it means an individual will be able to leave 500,000 pounds, and a couple up to a million, without their estate being subject to inheritance tax at all.
If you are single and die during the tax year 2016-2017 with an estate worth more than £325,000 (including money, property and investments, but after deducting debts and expenses such as funeral costs), 40% tax will become due to anything above £325,000.
For example, if you leave behind an estate worth £500,000 the tax bill will be £70,000 (40% in £175,000 – the difference between £500,000 and £325,000).
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