Make a will – but don’t let the tax-tail wag the dog. Here’s what you need to know.
Estate duty, capital transfer tax and now inheritance tax – some form of death tax has existed in the UK since the 19th century and has developed into something quite complex.
While it’s possible for inheritance tax to be charged on transfers of assets during a lifetime, it mostly arises on death.
What is inheritance tax?
Inheritance tax is charged on the value of someone’s estate when they die. The value is calculated by adding all assets together and deducting any liabilities.
The assets will be anything to which the deceased was beneficially entitled, including their own assets, their share of jointly held assets and assets held in trust.
Exemptions, allowances and/or reliefs are then applied to give the taxable estate. The tax is levied at 40 per cent, although a lower rate of 36 per cent is available, where 10 per cent of the gross estate is left to charity.
How could inheritance tax affect me?
The inheritance tax threshold is currently £325,000 for individuals. If your estate, after you’ve added together assets and deducted liabilities, is over £325,000, there could be an inheritance tax bill on your death. Inheritance tax is charged at 40 per cent on everything over that amount.
Transfers between spouses/civil partners are exempt from inheritance tax. You can inherit your spouse’s £325,000 allowance provided they’ve not already used it up (by making gifts to non-exempt beneficiaries or other lifetime gifts).
Where spouses leave everything to each other, when the survivor dies, they can leave up to £650,000 without paying inheritance tax.
What else do I need to know about inheritance tax?
The Residence Nil-Rate Band allowance (which is complex, limited to certain circumstances and tightly linked to property ownership) could increase your £325,000 threshold by a further £175,000. You can inherit this additional allowance from your spouse too.
Gifts to charities and some political parties are also exempt from inheritance tax.
The exemption for soldiers who die in the line of duty, contained in the Inheritance Tax Act 1984, can also be used for emergency personnel/frontline workers if they die due to COVID-19.
Considering your tax position is only one aspect of will planning – you’ll inevitably have other priorities to consider, which are no less important.
Seeking the right advice early on will help you to achieve what is right for you in the most tax-efficient way.
After all, no one wants to leave everything to the taxman!
Muckle’s Cumbrian-based private client team specialises in supporting high net-worth individuals, business owners and landowners on private legal matters.
