Inheritance tax is something we would rather do without. However the government has the upper hand and the best we can do is choose any legal wiggle room we can find. If we leave money or other assets our heirs might otherwise have to fork out 40% of the value.
Inheritance tax applies to all our assets, whether they are property, savings or other possessions. The only things that can come off the total are funeral expenses and debts. However, it might be stretching things too far if your heirs take a luxury round-the-world cruise for the purposes of scattering your ashes.
Fortunately, the UK government does make a few concessions and we should grab them with both hands while we are alive. We can give away a portion of our money without paying tax. If this brings us within the tax-free allowance so much the better but do make sure you do this legally of course.
The 2019 to 2020 Thresholds and Rates
The standard rate is 40% of the amount over £325,000. This means if the taxable value of your estate is £405,000 your heirs take it on the chin for an amount of £32,000. However there’s a further break for couples married, or in a civil partnership.
If you leave your home or property to a family member, then you’re now allowed a transferable allowance of £175,000 representing a £25,000 increase.
Special Inheritance Tax Deals for Spouses
The UK government has come a long way towards regarding marriages and civil partnerships as shared estates.
The surviving partner may now apply both tax free allowances provided the deceased partner did not give away large amounts of money in their will. Moreover, under the new rules the surviving partner may now receive up to £650,000 from their late partner (or £960,000 including the deceased’s home).
Did You Know You Can Avoid Tax by Giving It Away?
If the idea of giving 40% away upon death really rankles, you can give some of it away before you die. You could for example buy your partner a swanky new car, or gift your charity with the cash equivalent. However, there’s a bit of a time bomb attached.
If you die shortly after your act of generosity, you gain nothing because the benefit gradually accumulates over seven years. That’s tough when we don’t know our sell by date but that’s the way the system works.
So Who Are the Lucky People Who Have to Shell Out?
Inheritance tax falls due the moment we die. This is raiding party on everything we own, less any money we owe and funeral expenses.
In theory, the beneficiaries of our gifts must pay the remaining inheritance tax themselves during the seven year window. As most of them have probably spent the money already, the government usually bills the estate.
Perhaps it’s good idea for recipients of these gifts to salt away 40% for a rainy day when their eyes are filled with tears. However they most probably won’t on the basis the estate will have money to cough up if they say their prayers nicely enough.