In this blog we cover what inheritance tax is, where it applies, and how you may be able to reduce its impact if it applies to you.
What is Inheritance Tax?
Inheritance tax can be applied when estate is transferred after the owner has passed away. The standard rate is 40%, and this is only applied to the part of your estate which is over £325,000. For example, if your estate is worth £500,000, the 40% is only charged from the £175,000 which goes above the £325,000 threshold. Therefore, the inheritance tax would total £70,000. Bear in mind that estate isn’t just property you own, it also counts as money and possessions, so if you have a house worth £300,000, it would only take another £25,000 in money and possessions to hit the threshold. If your home is given away to your children or grandchildren, the threshold can increase to £475,000.
Why is Inheritance Tax unpopular?
Inheritance tax can be seen as taxing people twice. Throughout our lives, we may pay taxes on all sorts; through work, investments, capital gains and more. If our money is then taxed when we pass it on, it’s essentially taxing income which has already been taxed before. However, inheritance tax only affects the richest 5% of families, equating to fewer than 25,000 estates across the country every year according to The Independent.
Could Inheritance Tax be scrapped?
Chancellor Sajid Javid has hinted at abolishing the unpopular tax in his upcoming Budget. He’s said that it’s “something that’s on my mind” and it’s unfair to target the elderly “all over again” when they die. The treasury gains over 5 billion pounds a year from death taxes, and the number of people liable to pay has nearly doubled since 2011. The average inheritance tax is a whopping £180,000.
A few days after the Chancellor, the Communities Secretary Robert Jenrick also hinted towards axing inheritance tax. He said “it is a tax which is particularly unpopular because people can see the fundamental unfairness of paying tax twice and people are having to leave property that they have saved up their whole lives to leave to their children and grandchildren, to then see them pay additional tax.”
Can you reduce the impact of Inheritance Tax?
There are ways you can legally reduce how much of your estate is taxed when you die. If you leave everything to a spouse, civil partner, charity or community amateur sports club, usually no tax needs to be paid. However if this isn’t where your estate will be going, you can give money away at least 7 years before you pass away and not be taxed. If given away within 7 years before death, it will be liable for the tax.
Be sure your will is up-to-date and created by a qualified adviser or solicitor as this will make things easier. You could also reach out to a professional financial planner to help assess your situation and advise what’s best for you. It’s generally best to have flexible financial plans so that you aren’t dependent on one outcome and can spread your risk.
I began writing for Property Press Online in October 2019. Particular areas of interest are housing market news and new developments in the market.