Inheritance tax is charged on the estate of a person who has passed away, and it is therefore the responsibility of the executor of a will to pay the bill. While the bill can be met out of a deceased person’s estate, some people view the levy as a “death tax”. As such, taking proactive and legal steps when a person is still alive to prepare for their loved ones is important.
This form of tax planning involves careful preparation, however, there are ways the bill can be slashed with relative ease.
The first point of consideration is the Inheritance Tax threshold, which for most people stands at £325,000.
An IHT bill can therefore be eliminated in its entirety if a person’s estate is worth less than this, or if they leave everything above the threshold to the following people or groups:
- a spouse
- a civil partner
- a charity
- a community amateur sports club
In addition, those who leave at least 10 percent of their estate to charity, could see the total IHT bill on the rest of their estate lowered too – to 36 percent instead of 40.
A person who gives away a gift must live for another seven years for the gift not to be subject to Inheritance Tax.
It is this aspect of a person’s estate which often requires the most forward planning to ensure a tax bill is as low as possible.
If there is Inheritance Tax to pay, then it is charged at 40 percent on gifts given in the three years before a person passes away.
However, for gifts made three to seven years before death, IHT is charged on a sliding scale known as taper relief.
For gifts given three to four years before death, IHT is at 32 percent, and at 24 percent for a gift passed on four to five years before someone dies.
As many gifts of up to £250 per person can also be given in a tax year, as long as another exemption has not been used on the same person.
And there are also ‘exempted gifts’ for children, grandchildren and great-grandchildren as well.
Each tax year, a person can give away a set number of wedding, Christmas or birthday presents as well as payments to help with living costs.
And more than one exemption can be used on the same person, for example giving a birthday and a wedding gift.
However, the amounts permitted can vary, and a person must be able to maintain their standard of living after making the gift.
Finally, gifts can also be made to charities and political parties as well, if a person wishes to do so.
Published at Fri, 23 Oct 2020 22:00:00 +0000