Budget Summary 2021
What can get an accountant more…
3rd March 2021Coronavirus has led to many people questioning what will happen if the worst were to happen, and you were to pass away. So, regardless of if you are experiencing the benefits of having some extra time during lockdown, then planning out your estate is a good thing to do.
What is inheritance tax?
When a person dies, their left behind assets, such as valuables or property are known as their estate.
If the total value of your estate is valued above a certain threshold, then inheritance tax may be charged on it. The normal rate of tax is 40% as of 2020, and it has been like that for quite some time.
There are wide-ranging factors that may protect a good deal of your estate from inheritance tax. A lot of people actually find that the number of exemptions mean that you end up with no inheritance tax liability at all. Some mitigations are automatically applied, but some others need planning so that you can benefit from them.
How can I automatically reduce my liabilities?
One of the biggest mitigations is when anything is left to a spouse or civil partner, or a charity or community sports club – it won’t be subject to inheritance tax.
It’s also worth keeping in mind that each year we are given a threshold, which signifies the amount your estate will have no inheritance tax liability. For 2020, this is £325,000. So, if your estate is worth less than this… no inheritance tax is liable to you. If you have more than £325,000 – the amount over the threshold will taxed.
This threshold can also be combined between married couples and civil partners for a total allowance of £650,000.
Since 2015, there has also been an extra mitigation to protect the estates of parents and grandparents when they decide to pass on main residences to children/grandchildren.
This is known as the residence nil-rate band, or the family home allowance. For 2020/21 it is worth £175,000 each for estates worth up to £2m. Again, this can be pooled between spouses, meaning if a main residence is involved you and your spouse could receive an inheritance tax exemption worth £1m.
Is there anything extra I can do?
If your estate is going to still face a liability after accounting for all the above, the are some other ways of reducing inheritance taxes.
For example, you can give gifts whilst you are still alive. HMRC classify gifts as anything that has a value, meaning it can include cash, possessions and property.
This definition by nature also catches selling something for less than market value, the difference counts as the gift in the mind of HMRC. There are some small gifts you can give away each tax year that do not have any inheritance tax implications. These are:
What is the seven-year rule?
If you survive seven years after giving a gift, there are no inheritance tax implications, regardless of the value of the gift in question.
Even if you were not to survive that long, the inheritance tax you pay will still be less.
The full 40% inheritance tax rate stands for three years after the gift is given, and then a sliding scale is put in place.
The rates are as follows:
However, the gift must be genuine – given unconditionally and without reservation. For example, if a parent were to give their house or a portion of their house to their children but continued to live in it as though it were their own. It would be beneficial to keep records of the gift, why it was given and the specific dates.
Are their any special situations to consider?
Here are some extra elements to consider in order to reduce your inheritance tax liabilities:
Alternatively, you can download the full guide here –
You can download the full guide here -……………………………………
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