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What is Inheritance Tax?

Qudsia Hameed discusses inheritance tax and the importance of estate planning.

Qudsia is a trainee solicitor working to help clients with their estate planning needs. She also has had seats working in Family and Immigration departments.

Inheritance tax is applied to estates when someone with enough assets dies. It is a 40% tax on anything above your nil rate allowances.

The value of your estate is based on the assets you own on the date of death. This includes your house, savings, investments, other properties, gifts within the past seven years, and your possessions.

What tax do I pay when I die?

When we think about what happens to our estate on death the main concern most people have is tax – after all, death and taxes are inevitable. Many people are not aware of the thresholds and reliefs available and assume that having a will in place protects them from any kind of tax on death – mainly inheritance tax.

Your estate must exceed the thresholds to be liable for inheritance tax. There are two bands available:

  • Nil Rate Band – £325,000
  • Residence Nil Rate Band – £175,000

The nil rate band allows everyone to give up to £325,000 free of inheritance tax on death/in the preceding seven years. Therefore, a married couple has £650,000 tax-free if they die in this current tax year.

Spousal exemptions provide further relief – if the deceased spouse died leaving the whole of their estate to the surviving spouse – there is normally no inheritance tax to pay. From 09 October 2007, the deceased spouse’s unused nil rate band and residential nil rate band are transferrable to the surviving spouse effectively leaving the surviving spouse with a threshold of £1,000,000.

If the spouse died leaving no nil rate band or having used their nil rate band then there could be inheritance tax to pay on second death. It is important to note that the option to transfer the nil rate band only applies to couples who are legally married and does not apply to cohabiting couples.

What can I do about my Inheritance Tax liability?

The first thing you should consider is a carefully drafted Will. Getting a Will can help you plan how you give after death using all the reliefs and exemptions available to you. If you would like to know more information about making a Will see our article – Making a Will is one of the most important things you can do…

Further, you could look at gifting assets prior to death. It is important that you get relevant advice from tax specialists prior to gifting anything like a property. There are rules around gifting and what constitutes a gift or a reserved benefit on a gift, which you do not want to fall foul.

Another aspect you could review is the reliefs available to you. These include business and agricultural property relief. By going to see a financial adviser, you can access recommendations around whether any solutions could solve your situation.

The most important aspect when reviewing your inheritance tax liability is to be realistic about your expectations. It is unlikely that you can mitigate all your tax liability while maintaining your other wishes.

What should I do next?

We can arrange an appointment with you to discuss your estate and Will. We may recommend speaking to a series of other advisers such as a financial or tax specialist. Our and their advice may help to mitigate your inheritance tax position. Get in touch with our Wills department today or see more information on our Estate Planning page here.