Inheritance Tax. It’s one of the UK’s biggest taxes around, taking up to 40% of your money! It occurs when you pass away and leave a large amount of money behind for someone. Below we have answered some of the most asked questions about inheritance tax so that you can start thinking about how you want to plan for or avoid the tax altogether. For the official advice you can always check out the HMRC website, but we do warn you: it’s not going to give you the simple definition. For that you’ll need to keep reading below.
Put simply, inheritance tax is a tax on any money, property, vehicles, insurance and investments you intend to leave behind when you die.
The tax rate is currently at 40% or 36% if you leave at least 10% to a charity. No joke. It really is that high… but here’s the good news: you only pay the tax if your entire estate is worth over the £325,000 inheritance tax threshold.
That means that if you have an estate worth £324,000 to leave behind, you pay no tax. If you have an estate worth £326,000 then you pay tax on the £1000 over £325,000 (£400 paid in tax).
Inheritance tax is taken when you die, never before then. Usually whomever makes sure the will is carried out or the administrator of the entire estate will pay the tax using funds taken straight from the estate.
Looking back through history you’ll certainly find a lot of controversy around this certain tax, but there are real reasons behind why we need to pay this tax on our inheritance. The idea is that when there is no tax the children of the very rich stay rich, while the poor stay poor. Through inheritance tax redistributions, some of the money of the rich will go back into the state so that everyone is society can benefit regardless of their class and financial state.
Of course, this tax is very high, and given the fact that tax has already been paid when the money was first earned, it can seem unfair on some people.
You might be thinking that there’s no way you would have to pay inheritance tax on your estate… but that could be wrong. House prices have certainly soared over the past several years and you could find that you’re sitting on a lot of money without even realising it!
There’s a really great calculator here that can give you a pretty accurate reading of how much inheritance tax you will have to pay – just fill in all of your details (being as exact as you can) and then find out exactly how much of your estate you will lose to the tax man.
Did you know that you can leave any assets to your spouse or civil partner and these will be exempt from any inheritance tax?!?! Furthermore, if your partner passes away and leaves behind under £325,000 to you, then when you pass away this amount will still be tax exempt when you pass it on again (to your children or other beneficiary) – even if you have your own £325,000. This means that there could be up to £650,000 tax free inheritance left to your children or other family members.
Money given away before you die is usually still counted as part of our estate – but if you survive for 7 years after giving that gift then it won’t be subjected to inheritance tax.
You can avoid some of the inheritance taxes by making sure you put your Life Insurance into trust – with Life Insurance, you can guarantee that your family will receive a payout on your death, and this sum of money could be greatly higher than any sum you could save up yourself. By leaving a policy in trust you leave the money to a person called a trustee – this person looks after the money before passing it on to the beneficiary (i.e. your child or the person you want the money to go to).