Inheritance tax: avoiding the potential pitfalls
A recent study found that just 45 per cent of people who are gifting assets or large sums of money through inheritance understand inheritance tax (IHT) rules.
The research was conducted by HM Revenue & Customs (HMRC) as they attempt to ascertain the public’s understanding of IHT and information on their gifting behaviour.
We have put together our top tips for avoiding the potential pitfalls of inheritance tax to ensure you make the most of your gift to your beneficiaries.
Prepare a Will
It’s important to be prepared by ensuring that you have a valid Will. There has been an increase in the number of DIY Wills, which can cause issues if it contains errors and doesn’t fulfil the legal requirements it must adhere to. You can avoid any potential issues by discussing this with an expert to ensure that your Will is legally binding, correctly administered and to avoid lengthy probate cases.
Explore your options
There are different tax-free allowances for making gifts, including the annual exemption of £3,000. In addition to this, any unused allowance from the previous tax year can be used, meaning that there is a possible £6,000 that can be gifted in a year, providing the exemption was not used the previous year.
Regular gifts from income can be made that will be exempt from IHT in the future, but they must be made from post-tax income, made habitually and leave you with enough income to maintain your standard of living.
There are other exemptions such as marriage gifts (up to £5,000 for children, £2,500 for grandchildren and £1,000 for anyone else), small gifts of up to £250 per year if the individual hasn’t received another gift that uses an exemption, and donations to charities and political parties.
Know the rules
There is usually no IHT to pay if either the value of your estate is below the £325,000 threshold, or if you leave anything above the £325,000 threshold to your spouse, civil partner, a charity or community amateur sports club.
If you give your home to your children (includes adopted, foster and stepchildren) or grandchildren, the threshold can increase to £475,000.
If you are married or in a civil partnership and your estate is below the threshold, any unused threshold can be added to your partner’s threshold when you die. This means it can potentially be £650,000 or up to £950,000.
The standard rate of IHT is 40 per cent, which is only charged on the part of your estate that is above the threshold.