You might have spent hours thinking about Inheritance Tax, or you might suddenly have realised that your estate is large enough to qualify (and now you’re panicking). 

Either way, you’re not alone. With rising property prices, more people are finding themselves having to consider the impact that Inheritance Tax will have on their finances. But we have good news. 

Firstly, there are practical steps you can take now to mitigate the impact on your family later.  And secondly, we can help you with all of them!

Here we’ll lay out the rules around Inheritance Tax, and give you some pointers on how you can plan to keep more of your money. 

 

No one wants to leave their family worrying about something like inheritance tax while they’re grieving, organising funerals, and all the other admin that comes with a loved one dying.  The best gift you can give your family? Sorting out as much as you can beforehand.  And that includes wills, Power of Attorney, and writing down your wishes. At Red 76 Tax, we have a network of trusted professionals who can help you check these off your list.

 

What are the Inheritance Tax rates?

Inheritance tax is based on the value of your estate when you die. This includes:

• any property, 
• money, 
• valuables and 
• insurance payouts. 

You can subtract what you owe on loans, mortgages, bills plus reasonable funeral costs. Gifts to charity when you were alive or that you left in your will also get taken off.

What’s left over is your estate’s net value. This net value gets checked against the inheritance tax thresholds to calculate if any tax is due. Keeping organised records makes working out the estate value straightforward. It also helps with future tax planning.

Inheritance tax is charged at 40% on the portion of an estate’s value that exceeds the nil-rate band threshold. However, the rate is reduced to 36% if you leave at least 10% of your estate to charity (see the rules here).

The current nil-rate band is £325,000. This means the first £325,000 of an estate’s value has an effective 0% inheritance tax rate. For couples, each individual has their own nil-rate band that their partner can inherit, meaning £650,000 is exempt for surviving spouses. 

Any estate value above the nil-rate threshold(s) is charged inheritance tax at 40% (or 36% with qualifying charitable bequests). For example, on an estate worth £500,000, the tax would apply to the £175,000 above the £325,000 nil rate band, resulting in a tax bill of £70,000 (or £63,000 if meeting the charity exemption rules).

What’s the most efficient way to pass on my family home?

If you pass on your home or share of a home to your direct descendants (children, adopted/stepchildren, foster children, grandchildren etc), you qualify for an additional inheritance tax residence nil-rate band.

This increases the tax-free threshold by up to £175,000 to £500,000 for single people or up to £1 million for couples.

However, your estate must be under £2 million to get the full residence nil-rate band. It decreases by £1 for every £2 over £2 million. And the home must be left to direct descendants – just leaving it to a spouse does not qualify for the additional allowance.

If assets were left to a spouse, their unused nil-rate band can be passed on to increase the survivor’s allowance threshold. This transfer means spouses can effectively shield £650,000 with their combined allowances.

Can I give gifts to people before I die?

To reduce the amount of inheritance tax your family will have to pay, you can choose to gift assets while you’re still alive.

Several types of lifetime gifts are completely exempt from inheritance tax, up to an annual exemption of £3,000 per tax year:

• • Small gifts up to £250 per person annually
  • Wedding/civil ceremony gifts up to £5,000 to a child. £2,500 to a grandchild or great-grandchild. £1,000 to any other person.
  • Paying the living costs of others from your income
  • Charitable and political donations

For other gifts, the 7-year rule means no tax is due if you live for 7 years after making them. But if you die within 7 years, gifts may be taxed on a sliding scale known as taper relief, from 40% down to 4%.

Gifts must be given completely and irreversibly without expecting anything in return. The person making the gift cannot continue benefiting from the asset they gifted to qualify for tax exemptions and taper relief. Ongoing use of a gifted asset (like living in a home) would not meet these gift rules.

How can a chartered accountant help me with Inheritance Tax?

You can get professional help from someone like a chartered accountant with things like valuing an estate and reporting its value to HMRC. This makes sure you meet the deadline and stay in compliance (without having to worry about extra paperwork at a stressful time).  This can take months, especially for large or complex estates. 

Firms like Red 76 can also assist with:

• Identifying all assets and liabilities to assess estate value
• Meeting tax payment and estate reporting deadlines
• Completing legislative probate processes if required

But you shouldn’t just wait until after the fact to look for help and support. 

A chartered accountancy firm can provide ongoing inheritance tax planning tailored to your assets and wishes for estate distribution. We can help you through decisions around gifting, trusts, charitable giving and more in line with an informed long-term estate strategy.

Professional guidance gives confidence your estate will comply with the latest UK inheritance tax rules while legally minimising liabilities. Why not give us a call?

So you get peace of mind, and your family gets the inheritance you want for them. 

Reach out to our friendly team here.