It turns out that even in death, we can’t escape taxes. Once you pass, your estate will be taxed before it is split between your beneficiaries.
However, with smart estate planning, you can reduce the amount of inheritance tax and therefore maximise the assets you leave to your beneficiaries. Please note that the inheritance tax rate and thresholds may be subject to change. Double-check the current rates before you start estate planning.
The inheritance tax will be paid by your estate, and the remaining money and assets are split between beneficiaries as decreed by your will. The executor of the will or administrator of the estate will usually organise the inheritance tax payment. It must be paid within 6 months of your death.
Because of the time limit on inheritance tax, it may not be feasible to sell assets to pay for the IHT. If there is sufficient cash in the estate, that will usually be used to pay the inheritance tax. Some people leave money aside for inheritance tax during their estate planning, and certain insurance life policies even provide finance for IHT. The tax-free threshold for inheritance tax is currently £325,000. Anything above £325,000 is taxed at 40%. However, if you leave everything above £325,000 to your spouse or civil partner, community amateur sports club, or charities, then it will not be taxed. Your spouse or civil partner must be living in the UK.
All assets are subject to inheritance tax. This includes:
All debts and liabilities are deducted from the estate, and only the remaining assets are subject to inheritance tax.
By taking the time to scrutinise your finances and carefully planning your estate, you can quite easily reduce your inheritance tax.
Gifts given within seven years of your death will still count as your estate and be subject to inheritance tax. However, there is a yearly allowance of £3,000 that you can gift IHT-free. This is total, not per person.
You can give up to £250 per person tax-free each year. You cannot combine this with the £3,000 gift allowance, so whoever receives some of the £3,000 cannot receive a further £250.
Money left to charity will not be taxed. Work out your charitable contributions wisely to avoid the £325,000 tax threshold.
Wedding gifts given shortly before or on the day of a wedding or civil partnership are tax-free. Parents of the couple may give up to £5,000 tax-free, grandparents up to £2,500, and anyone else up to £1,000. If the wedding does not go ahead, then you cannot give this money tax-free.
When you put money or assets into a trust for your heirs, it is not counted as part of your estate and therefore is not subject to IHT. This money may be used to finance a house, education, or even provide an income. The beneficiary may be subject to income tax or capital gains tax but will avoid inheritance tax.
Because these assets are jointly shared through the nature of your relationship, they are not subject to inheritance tax. Take advantage of this exception and leave any remaining amount over the threshold to your partner.