When planning for the future, many people focus on ensuring their loved ones are well taken care of. However, one crucial element that’s often overlooked is inheritance tax. This can significantly impact the legacy you leave behind.
Inheritance tax doesn’t have to be daunting, but it does require planning – especially when it comes to writing or updating your Will. Working with an experienced solicitor can help make sure your wishes are carried out without leaving your loved ones liable for an unexpected tax bill.
What is inheritance tax?
Inheritance tax is a tax on the estate (property, money and possessions) of someone who’s died. In the UK, the standard inheritance tax rate is 40%, but it’s only applied to the portion of your estate that exceeds the current threshold, known as the nil-rate band. This threshold is currently £325,000.
If your estate is worth less than £325,000, there’s normally no inheritance tax to pay. If it’s worth more, only the amount above the threshold is taxed. For example, if your estate is valued at £500,000, you would potentially pay 40% tax on the £175,000 that’s over the threshold.
But there are also additional allowances and reliefs that many people can use to reduce or even remove the inheritance tax owed on their assets. For example, anything you leave to a spouse or civil partner is exempt from inheritance tax. There is also something called the residence nil-rate band – an extra allowance if you pass on your main home to your children or grandchildren, which can increase your tax-free threshold up to £500,000.
The reality is that only a small percentage of the population end up being liable for inheritance tax. But it’s absolutely crucial to know whether that’s you, and to take action to help protect your loved ones’ financial futures.
When do you pay inheritance tax?
Inheritance tax is usually paid from your estate before anything is distributed to your beneficiaries. The executor of your Will is responsible for arranging the payment of inheritance tax, typically using funds from your estate.
If the Tax is not paid by the end of the sixth month after death, then interest will be charged on the tax owing so it’s important that it’s paid promptly and there are no surprises to slow things down.
How inheritance tax affects your Will
Your Will is the legal document that sets out who should receive your estate after you die. But without proper inheritance tax planning, a large portion of what you intended to pass on could end up going to HMRC instead of your loved ones.
Here are a few key ways your Will can impact the inheritance tax that’s owed:
● Gifts and exemptions: Certain gifts made during your life – such as gifts to your spouse or to charity – are usually exempt from inheritance tax.
● Trusts: Setting up a trust in your Will can help manage how and when your estate is passed on, and in some cases, reduce the inheritance tax bill.
● Spouse exemptions: Anything left to a spouse or civil partner is usually exempt from inheritance tax.
Keen to make sure your Will reflects the financial interests of your loved ones? Speak to the experts at Batt Broadbent today.