Inheritance Tax can be a bit of a mind field and often something people wish to get their head around so they can make the best decisions for their estate and their beneficiaries. In this blog, we look at whether you will need to pay Inheritance Tax if you have been gifted your parents' home.
What is Inheritance Tax?
Inheritance Tax is a tax which is paid on death on any assets over the government determined threshold. IHT is often referred to as a voluntary tax and this because with careful later and after-life planning you can significantly minimise the amount of tax your estate must pay on your death.
What is the IHT threshold?
IHT is not payable on any assets up to the value of Ā£325,000 (the nil-rate band), after this IHT is charged at 40% on anything above Ā£325,000. There are ways in which you may have an estate which is larger than Ā£325,000, however you may still be able to avoid paying any tax.
Tax Relief - Spouses/Civil Partners
If you leave your entire estate to your spouse or civil partner, then you will not pay any tax even if your estate exceeds the nil rate band.
Spouses can pass on any IHT they did not use, for example if on first death the spouse passed their entire estate to the surviving spouse, which is most commonly the case, then they will be able to pass on their entire nil-rate band to the surviving spouse. This would mean the survivor would have a total of Ā£650,000 before IHT would be liable on the estate. Thus meaning, if your parent had been widowed before they passed, they would most likely have a larger nil-rate band to use.
Tax Relief - Children
If a parent passes a property to their child/children, then they will get a larger amount of tax relief on their estate. If a property is passed to any children then that person is granted an additional Ā£175,000 tax free. This would take a single persons nil-rate band to Ā£500,000, or a surviving spouses nil-rate band to Ā£825,000.
Passing a property to a child may not completely avoid IHT, it may still be payable if the estate exceeds the additional nil-rate band. However, the additional tax relief does mean if tax is due, less tax is owed from the estate.
Tax Relief Through Estate Planning
There are ways to plan for the future to ensure you minimise or eradicate any tax that is due if your estate exceeds the correct nil-rate band for your circumstances. The best and most common way of later life planning for tax is to take out a Trust.
Once assets are in Trust, whilst you retain control of the assets, they are not technically seen as yours, rather than property of the Trust. This means that when your estate is being calculated on death the assets in Trust are not included. This could significantly reduce the size of your estate, therefore reducing, if not eliminating the amount of tax that may be payable.
Planning for the Future
Planning for the future is critical to ensure that the estate you have worked to build is given to your loved ones in its entirety, without any part of it being lost through tax. This is why is crucial to speak to experts who can help you plan for later in life and give you peace of mind.
If you would like to book a free consultation, you can speak to one of our expert consultants today by contacting us on 0330 390 9200 or email us on info@thomasbradleylegal.co.uk
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