Inheritance Tax: One important rule for couples to note on their IHT bill
Inheritance tax stands at 40 percent and is usually payable on the value of any estate in the United Kingdom which is above the set £325,000 threshold. For those who have an estate value below this threshold, this still needs to be reported to HMRC in order to receive an accurate valuation. The government has laid out specific rules for couples who are married or in a civil partnership.
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These rules are particularly important to consider, and there is one which has a special bearing on the amount couples will be required to pay.
Inheritance Tax is only charged on the part of an estate which is above the threshold, but many have described it as a ‘death tax’, and it is not popular in the UK.
However, one rule is likely to exclude couples from the tax.
There is normally no Inheritance Tax to pay if a person leaves everything above the £325,000 threshold to a spouse or civil partner, among other groups.
This is often a way many Britons are able to legally avoid Inheritance Tax from HMRC every year.
It is also worth noting that for people who are married or in a civil partnership, with an estate worth less than their threshold, any unused threshold can be added to their partner’s threshold.
This means a partner could boost their threshold, and set it as much as £1million.
However, it is vital for people to consider gifts given before their death, as these too can impact an IHT bill.
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Gifts are considered as anything with value, including money, property and possessions.
The seven-year rule means gifts given within seven years of a person’s death are usually subject to the tax.
This, however, is dependent on how soon a gift was given to a person’s death.
This is called taper relief, and the government has provided a guide to how much people could be charged.
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For gifts given less than three years before death 40 percent tax is charged, with this amount reducing to 32 percent between three to four years.
Gifts given four to five years before death are taxed at 24 percent, reducing to 16 percent five to six years before death.
Finally, gifts given six to seven years before death are taxed at eight percent, and those given over seven years before death are free of tax.
However, there is no Inheritance Tax to pay on gifts which are given between spouses or civil partners.
People can give their partners as much as they like during their lifetime, as long as they are resident in the UK permanently.
Other gifts are also exempted, such as small gifts of up to £250, and Christmas or birthday presents.
People can also leave significantly more than previously to direct descendants such as children or grandchildren.
As of April 2020, this increased to £175,000, effectively raising an IHT free allowance to £500,000 for many people.
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