What Is Inheritance Tax?
The concept of inheritance tax is really very simple. When you die, the Government does a complete assessment of your assets value, before deducting your debts to come up with a final figure. To be clear, when we say assets, we mean:
- Cash in your bank account
- Any property or business that you own
- Any vehicles in your name
- Payouts from life insurance policies
Once this has all been added up the government will then inform you how much tax you owe. Typically, your estate will need to pay 40% tax on anything above the threshold of £325,000 (this threshold ma change slightly depending on when you die). It’s a bit of a morbid thought, but planning out your estate and what you intend to leave could save you and your loved ones hundreds of thousands.
Who Pays Inheritance Your Tax?
The policies on inheritance tax change slightly with each new government, but in general remain the same. In the 2015/16-tax year you can leave an estate up to the value of £325,000 without anyone paying tax on it. Anything above that amount is subject to 40% taxation by the government. So for example, if you leave behind an estate worth £500,000, the first £325,000 of that is tax free, but the remaining £175,000 is taxed at 40%. That’s a total of £70,000 in tax. One of the ways around inheritance tax is to give large gifts before you die.
What Counts As A Gift?
In order to constitute a gift in the governments eyes, the sum or item given must be genuine, unconditional and something that you will not gain from. This might sound simple, but can be very difficult to get around. For example, the biggest asset many people own is their house. Yet if you tried to give half of this to your children as a gift, it would not offset against inheritance tax because you are still living there and are gaining from the asset. There are many valid gifts that can be given, but they must not be given conditionally.
The other downside to purely financial gifts (such as giving large sums of money) is that they are only free of inheritance tax if the giver doesn’t die within 7 years of giving the gift. This rules out giving deathbed gifts as a way of getting around inheritance tax, as they would still be subject to 40% tax.
Should I Seek Financial Advice?
The short answer to this is yes, definitely. Inheritance tax is a huge money saver for nearly everyone, and you don’t need to be super savvy or super rich to make the most of it. If you have assets you haven’t planned for, concerns about inheritance tax or personal tax services, or questions about what gifts you could give, get in touch today
for a free, no obligation consultation from our estate solicitors. Alternatively, if you reach an age or suffer from a medical condition where you become incapable of managing your own affairs, our power of attorney solicitors can help appoint somebody to take over your asset management.