Inheritance Tax
What is Inheritance Tax and will it affect my estate?
Inheritance Tax is charged at the rate of 40% on the amount by which an estate exceeds the threshold in force at the date of death. This threshold is currently £325,000 but is, like any other tax, subject to change each year when the Chancellor brings out his Budget.
This means that, generally speaking, if someone dies leaving a net estate (ie, value of assets less total of debts) of, say, £350,000, then Inheritance Tax would be charged as follows:
On the first £325,000 NIL
On balance £25,000 @ 40% £10,000
Net Estate £340,000 Tax payable £10,000
It should also be noted that the Nil Rate Band available at death is reduced by gifts made within the seven years before death.
The good news is that there are various exemptions and relief from the tax, the most important being the total exemption that applies to any part of the estate which is left to the husband or wife of the deceased. Thus you can leave the whole of your estate to your husband or wife and no Inheritance Tax will be payable.
Another important exemption is that which is allowed for any gift in a Will to Charity. This means that if the owner of the £350,000 estate illustrated above had left a legacy of £25,000 to a Charity or Charities, this would be taken out of the value of the estate for Inheritance Tax purposes. This would leave an estate of only £325,000 upon which no tax would be payable. In other words, in the above circumstances, a charitable legacy of £25,000 saves Inheritance Tax of £10,000.
Remember that your “estate” for the purposes of Inheritance Tax includes the value of everything you own at the date of your death less everything you owe. Obviously, if your estate on death is likely to be worth less than £325,000, Inheritance Tax will not be an issue – and £325,000 sounds to most of us like an awful lot of money.
However, many people are surprised to discover that their “Estate” is considerably greater than they think. In other words, they are richer than they feel! If, for instance, you own a house and you have a mortgage (or are contemplating taking on a house and mortgage one day), it is likely that you will also have a Mortgage Protection insurance policy. This means that any balance outstanding on your mortgage will be paid off by the insurance company on your death, leaving the whole value of your house to form part of your estate. Add to that any Life Assurance, the value of any car you own plus any savings you may amass during the coming years and you could get quite a surprise – suddenly that £325,000 Inheritance Tax threshold doesn’t seem quite so irrelevant to you after all!
It pays to take Inheritance Tax into account when thinking about your Will.
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