When planning for inheritance tax you may realise your loved ones will need to pay a large chunk to the taxman after your passing. Here are some quick facts about inheritance tax:
- The first £325,000 of your estate is tax-free.
- In most cases, the first £175,000 of your property will be tax-free per beneficiary.
- Otherwise, your estate will owe 40% on anything above the £325,000 threshold.
There are some easy ways to reduce the tax your estate will pay after you die. With a little bit of prior planning, you can save your estate a lot of money!
Leaving your estate to your spouse
When you die, assets left to your spouse or registered civil partner are exempt from inheritance tax. If you are unmarried your estate can be left tax-free to a goverment organisation or charity.
Making small gifts
If you can afford to, it’s worth gifting before you die. Gifts of cash or valuable assets can be excluded from your estate if given before death. There are a couple of rules to this though.
You can give away £3000 each year completely tax-free. If you do not give away £3000 in one year, you can carry it forward one more tax year. So every two years you could gift £6000. It’s very easy to reduce the size of your estate by gifting small amounts – you can start doing it today!
Making large gifts
Additionally, you can gift a larger amount, but you must live another 7 years for it to be tax-free.
For example, if you gift your children £50,000 in all, and you pass away 7 years later, it will not be included in your estate. However, if you gift that amount and pass away the following year, the £50,000 will eat into the £325,000 allowance mention earlier.
If you should gift over £325,000 and pass away in sooner than 7 years, the gifts over that threshold will be included in your estate and taxed at 40%.
You can also give large gifts towards a wedding tax-free. If you gift at or shortly before the wedding day, the gift will be excluded from the estate. Be aware thought that his has restrictions:
- Parents can gift £5000 tax-free
- Grandparents can gift £2500 tax-free
- Anyone else can gift £1000 tax-free
These are just a few of the easy ways to plan for inheritance tax. I recommend getting further financial advice. A sure-fire way to plan your estate for tax is by writing a Will. You can contact me here to find out more.
Best wishes, Catherine Sawbridge