Given death is a certainty in life, most of us are likely to receive some form of inheritance at some stage in our life. As such, it may benefit you to have a basic understanding of how inheritance tax works. To this end, we have prepared a brief article answering some of the most common questions surrounding inheritance tax. Read on to find out more!
What is inheritance tax?
Inheritance tax is a tax payable on the estate of an individual who has died. Inheritance tax applies to individuals on the basis of their domicile, meaning those domiciled in the United Kingdom would be subject to U.K inheritance tax on assets held across the globe.
What is considered a large inheritance?
What can be considered a large inheritance is subjective and will depend on each individual. Generally, any amount over £100,000 would be considered a significant inheritance. However, tax at 40% is only applied estates valued over £325,000, or £650,000 upon death of a UK domiciled widow/er.
Do I have to pay inheritance tax on my parents’ house?
Unfortunately, most assets owned by the deceased are subject to inheritance tax, including properties. There may be an extra £175,000 of tax-free allowances available to offset against property when a property which the deceased has occupied during their lifetime is passed onto their direct descendants. Estates valued above £2 million, will not be entitled to the full £175,000 allowance, and once the estate is valued above £2.7 million for a widow/er, or £2.35 million for a single person, the property allowance is lost in full. However, any of your parent’s debts or liabilities can be deducted from the value of the estate. This means that you may be able to offset the taxable amount provided that your parents passed away with enough debts to push the estate value beneath the taxable threshold[RE1] . Alternatively, you can also reduce the amount of taxes your estate would pay by:
- Making gifts;
- Life assurance;
- Using a trust;
- Writing a will; or
- Charitable donations.
If you would like any further information on how to reduce your inheritance tax obligations, we recommend reaching out to speak to one of our advisors today!
How much can you inherit without paying taxes in 2022 UK?
There is usually no IHT to pay on death if the value of the estate is under the nil-rate band which is currently £325,000, or if the entire estate is left to a UK domiciled spouse.
How much can I gift to my children?
A total of £3000 per tax year can be gifted to either one individual or split between multiple individuals, this is referred to as your annual exemption.
Further gifts of up to £250 per tax year can be made without incurring any obligations under HMRC inheritance tax legislation to as many people as you wish, provided that the individual did not benefit from any other exemptions
Any unused annual exemptions may be carried over for one tax year. For example, if you did not use your £3000 gift exemption this year, you can gift up to £6000 the following year, but not £9000 the year after.
Lastly, if your child is getting married or entering into a civil partnership, you are permitted to gift them an additional £5000. This £5000 can be combined with your £3000 annual exemption but not with your £250 small gift allowance.
Should you require any further information on gift exemptions or more specialised advice for your specific situation, feel free to contact one of our advisors.
How does the 7-year inheritance tax rule work?
In short, gifts made over seven years before your death are usually not subject to inheritance tax. For example, if you gave your child £250,000 at the age of 60 and died at the age of 68, the £250,000 would not be subject to inheritance tax. This is known as the 7-year rule.
In the event that you die within seven years of making a gift, the amount of inheritance tax payable depends on when the gift was made. Any gifts given within three years of your death are included in the estate valuation without any relief. Giftswithin 3-7 years prior to your death must be added back into the estate valuation, and if there is tax to pay on the gift, taper relief will reduce the amount of tax payable on a sliding scale. You can find the exact details of this scale below.
|Years Between Gift & Death||Rate of Tax Payable|
It is an old adage among lawyers that the law must be certain yet never remain still. As such, the regulatory framework that governs inheritance tax is always at risk of changing. You can find one of the most recent developments in one of our articles here: https://www.devere-group.com/more-families-to-be-hit-by-jeremy-hunts-stealth-inheritance-tax-raid/. In order to keep abreast of any developments, we recommend reading the UK budget summary and keeping up with our website.
We hope that this short article was useful for you and answered any questions you might have about inheritance tax. If we failed to answer your question here, or you need further clarification on any of the points mentioned above, we strongly recommend booking an appointment to speak with one of our expert advisors. Thank you for reading.