How Inheritance Tax Works

Published: 8 August 2019

Inheritance tax refers to the tax paid on the estate of somebody who has passed away. Usually, there’s no tax to be paid if the value of the estate is below £325,000 (including assets), also known as the nil rate band.

Beyond £325,000.00, you will be liable to pay 40% on anything above the £325,000.00 limit. However, if you decide to leave 10% or more of your estate to a charity, you’ll only pay 36% in inheritance tax.

One of the fastest and most efficient ways to reduce inheritance tax is to reduce the amount of liabilities. Here are some ways to avoid paying hefty amounts of inheritance tax:

1. Make a Will - by outlining exactly who and where your estate is going to in the event of your death can help to avoid the state taking ownership of your estate, and therefore paying higher fees.

2. Leave your estate to your spouse - signing over your estate to your spouse will mean that neither of you will pay inheritance tax on the amount of the estate handed over.

3. Donate to a Charity - donating to charity or an organisation that is tax-exempt can save you from paying inheritance tax.

4. Transfer assets whilst you are able to do so - transferring assets to other people such as members of the family or friends will mean that the overall total worth of your estate will decrease.

5. Create a trust fund - trust funds are created in the trustees' name which therefore deems the trust tax-free.

6. Life insurance or life assurance - setting up an insurance policy whereby the policy is held in trust. This ensures that the insurance pay-out won’t be counted as part of your estate and therefore won’t be subject to Inheritance Tax.

7. Gifts - you can gift assets to anyone other than a spouse. The annual limit for this is £3,000 before they are added to your estate. These could be in increments to individuals, so long as the amount totals £3,000 at the end of the tax year, neither you nor the recipient will be liable to pay tax on it.

8. Marriage gifts - if somebody that you know is getting married then you are able to give them gifts without it being subject to inheritance tax. This can be up to £5,000.00.

Who pays inheritance tax?

Inheritance tax can differ on who pays the bill. For example, recipients of gifts from the deceased within the previous seven years which exceeds the £3,000 annual limit will be personally subject to paying the tax bill - not the estate.

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