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Death & Taxes: Inheritance Tax Basics

Death & Taxes: Inheritance Tax Basics

  

Death & Taxes: Inheritance Tax Basics

Welcome to Brooks Wills. 

Providing expert will writing services in Bournemouth, Poole, Christchurch, and surrounding areas.

Inheritance tax is quite complicated and quite controversial. It is argued by many that Inheritance Tax has become a tax on the middle classes and below. Once upon a time £325,000 was a lot of money. Now you can barely buy a 3 bedroom house in the South of England with it.

We won’t cover everything about IHT here fully. The complexities are saved for other articles. But we have made the basics as simple as possible for you to understand.

What is it?

Inheritance tax is a tax that is applied to your estate when you die. Your estate will be charged 40% of everything that exceeds £325,000.

Who pays it?

You foot the bill typically, and it is paid from your residual estate. The residual estate – or simply residue – is the final amount that is left once all other gifts under the will have been made. You can specify in your will in what way the tax bill is paid.

How does it work?

We are each granted a tax-free amount on our death.  This is called the Nil-Rate Band.  The Nil-Rate Band is set at £325,000.  The HMRC will take 40% of everything beyond that.

Example: Your estate is worth £1,325,000 when you die. The first £325,000 will be tax free.

This leaves £1,000,000 of which the HMRC will take 40%: £400,000

This means that your beneficiaries will be left with £600,000  plus the £325,000 that escaped the taxman.

£600,000 + £325,000 = £925,000

Is there anything I can do to reduce it?

There are certain reliefs and other things to take into consideration.

Firstly, it helps to be married or in a civil partnership. The surviving spouse or partner won’t pay any inheritance tax on anything they inherit from you. They will also inherit your unused Nil-Rate Band. This means that when your surviving spouse/CP passes away, their Nil-Rate Band has the potential to be double. The first £650,000 of their estate would potentially  be tax free.

Secondly is the Residence Nil-Rate Band. If your family home is to be inherited by your children, then you will qualify for this. This is an extra amount of £175,000 per person. The first £500,000 of your estate would be tax free. If you’re a surviving spouse or civil partner that inherited your spouse’s NRB and RNRB, the first £1,000,000 of the estate would then be tax free.

Is there anything else worth considering?

There are plenty of other things worth considering. Like business assets, trusts, and other assets that do not pass under a will.

But it is beyond the scope of this article and you can find out more through the links above.

 

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