The threshold for Inheritance Tax (IHT) has remained the same for seven years. It has been payable at a rate of 40% on the value of an estate worth more than $325,000 since 2010.
While it’s stayed the same since then, house prices haven’t. In many areas of the UK they have soared ever higher, which means an increasing number of people are at risk of leaving behind a potentially high IHT bill for loved ones to deal with after they die.
Bear in mind the ‘estate’ isn’t just your property. It also includes your assets such as jewellery, art and antiques, your vehicles and furniture.
How to reduce IHT
There are ways to reduce the IHT bills your loves ones will be hit with after your death. Here are seven steps to take to keep IHT charges to a minimum:
- Annual exemption – you can give away up to the amount of £3,000 every tax year. This amount will be free of IHT.
- Small individual gifts – you can make any amount of small individual gifts under £250 in any tax year. This is on top of the annual exemption amount of up to £3,000 and will also be free of IHT. However, you can’t give one of these small individual gifts to anyone you have already given the £3,000 annual exemption allowance to.
- Normal gifts – you can make any usual gifts from your income free of IHT. These cover Christmas or birthday gifts. However, you must be left with enough money to maintain your normal standard of living after the gift has been made.
- Other gifts – you can give a gift up to £5,000 free of IHT to your child if they’re getting married or in a civil partnership. This also applies to a gift of up to £2,500 to a grandchild or great grandchild, or up to £1,000 to anyone else.
- Potentially exempt transfers – you can give away larger amounts of money as gifts, but you must live for seven years at least after the gift is made to qualify for IHT exemption. Any gifts made three to seven years before you die will be taxed on a sliding scale, called ‘taper relief’.
- Family home allowance – if you have any direct descendants then you are also entitled to something called ‘family home allowance’. This was introduced in April this year, and is up to £125,000 in April 2018, to £150,000 in April 2019, before reaching £175,000 by 2020.
- Married or civil partners – there are separate rules for civil partners and married couples meaning you can transfer your estate to your spouse free of IHT, in addition to any IHT allowance you haven’t yet used. Therefore, when the surviving partner or spouse dies they could have an IHT allowance of up to the amount of £650,000.
Planning for IHT can be complicated and it’s always a good idea to get some professional financial advice if you’re not sure what to do. Tax rules also change quite often, so it’s worthwhile regularly reviewing your financial situation to make sure that you are utilising all the current allowances and tax reliefs available.