We are paying £1.2 billion more than necessary in inheritance tax, according to new research! These are frightening statistics and with well-informed estate planning, can be significantly reduced. Inheritance Tax is paid on death at the rate of 40%. There are, however, some very important allowances.
First, we each have a Nil Rate Band allowance of £325,000 and second there is a Residence Nil Rate Band allowance of £175,000. This latter allowance applies if there is a family home which passes to the lineal descendants.
For married couples and civil partners. transfers are tax free. In addition, on second death the Nil Rate Band allowance and, if applicable, the Residence Nil Rate Band allowance of the first to die may be claimed.
The overall impact of these allowances is that for married couples, or civil partners with a family home valued in excess of £350,000, which passes to the lineal descendants, estates of less than £1m escape Inheritance Tax.
Gifts to charity are exempt and, if they exceed 10% of the estate, will result in a reduced rate of tax of 36%
There are also a number of smaller allowances which are very useful:
- Gifting. You are free to gift any amount of money to family or friends at any time. However, if you die within 7 years of making the gift, all or part of the gift is added back to your estate for the purposes of calculating IHT.
- In addition to the above, there is an annual gift allowance of £3000, which can also be rolled over to the following year if not used. There are no restrictions on life expectancy with this exemption.
- Also, we mustn’t forget, the small gifts IHT rule, which means people can give as many gifts of up to £250 per person during any one tax year. The only restriction, is that it must not being used in conjunction with another exemption on the same individual.
- Additionally, within limits, gifts to the bride and groom on marriage are also allowable.