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Top Guide To Inheritance Tax
Creating a will is important to do at any point in your life. Especially if you have assets you want your family and friends to inherit. However, when you draft your will you should keep in mind that you may be obliged to pay a certain amount in taxes. This is known as inheritance tax.
What is inheritance tax?
Inheritance tax in the UK is a tax on the estate (including money, property, and possessions) of someone who has passed away. The amount you may be required to pay depends on the real value of the estate. Such value can be based on a number of assets such as investments, cash in the bank, business, or property, for example. This is minus any debts and liabilities that the person leaving the inheritance may have. But how much tax may you have to pay?
How much tax is paid?
First things first, you won’t have to pay any tax if:
• The estate’s value is less than the Nil Rate Band (NRB) of £325,000.
• You leave everything that you own, and this is over the £325,000 threshold, to a community amateur sports club, civil partner, charity, or your spouse.
However, you should note that your estate will be liable for a 40% tax rate if its value is above the NRB value. You are also subject to a 36% tax rate if you decide to leave at least 10% of the estate’s net value to a charity.
IHT scrapped – what should you know?
A recent change in the IHT bill now allows parents and grandparents to leave the main residence of up to £1m (for couples) or £500,000 (for singles) before having to pay any tax. However, this depends on when someone passes away, and to who they leave the property. The change gives the potential to save £160,000 in inheritance tax when one passes away.
What is the main residence nil-rate band?
This allowance, introduced in April 2017 is a change that gives property owners the freedom to leave their homes to family without any taxation. With this allowance, you can enjoy an extra £150,000 in tax-free allowance during the 2019/20 tax period, as long as you leave your home to a direct descendant.
Not everyone qualifies for the full allowance. If the total value of your estate is more than £2m, the extra allowance will fall off by £1 for every £2 above the listed threshold. Another important thing to keep in mind is that civil partners and married spouses can utilise the unused allowance of a deceased partner. What this means is that they have the capability to pass on any property with a value of up to £300,000 without any taxation in the 2019/2020 tax year.
So, who can inherit property tax-free?
The rules guiding the inheritance tax bill state that direct descendants are the only ones who can inherit property without being subjected to tax. Direct descendants are listed as:
• Children and their civil partners or spouses
• Stepchildren
• Foster children
• Grandchildren and their spouses or civil partners
• Adopted children
• Children under the guardianship of whoever is passing on the estate
• Great-grandkids and their spouses or civil partners
What this means, therefore, is that relatives such as nephews, nieces, and even siblings cannot benefit from the tax-free allowance.
Final thought
Thank you for reading this blog. Inheritance tax and everything surrounding it can be complicated at first. The good thing, however, is that there are professionals qualified to guide you through all the inheritance tax forms and the process as a whole.
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