Wills: Inheritance Tax Basics
What Is Inheritance Tax?
Inheritance tax, also known as estate tax or death duty, is a tax that is imposed on the transfer of assets after a person's death. This tax applies to the total value of an individual's estate, which includes all property, assets, and possessions. The tax rate varies depending on the size of the estate, but it can reach up to 40% in some countries.
The primary purpose of inheritance tax is to generate revenue for the government, which can then be used for public services and infrastructure projects. Some governments also use inheritance tax as a way to redistribute wealth and promote social equality.
Inheritance Tax Allowance
The UK Inheritance Tax Allowance is currently set at £325,000. This means that if the total value of the estate is less than £325,000, then there will be no inheritance tax payable. However, if the value of the estate is above this threshold, then the beneficiaries will be required to pay a tax of 40% on the amount above £325,000.
It's important to note that certain assets are exempt from inheritance tax, such as assets that are left to a spouse or civil partner, as well as assets that are left to a charity. In addition, the value of the family home may also be exempt from inheritance tax under certain circumstances.
Is It Possible To Avoid Inheritance Tax?
For those who are concerned about the impact of inheritance tax on their estate, there are certain strategies that can be employed to reduce the amount of tax payable. One popular strategy is to make use of the annual gifting allowance, which allows an individual to give away up to £3,000 per year without incurring any tax.
Another strategy is to use a trust. By placing assets into a trust, they are effectively removed from the estate for inheritance tax purposes. However, it's important to note that there are strict rules around trusts, and they can be complex to set up and manage.
AT ONCE Wills and Trusts we can take a look at your individual circumstances and provide a detailed review of your situation and provide bespoke strategies to reduce and in some cases completely mitigate any inheritance tax liability in the future.
Inheritance Tax Trap #1: Gifts with Reservation of Benefit (GROBs)
A gift with reservation of benefit is a legal arrangement where a person gives away an asset, such as property or money, but continues to benefit from it. The person giving away the asset is called the donor, while the one who receives it is the recipient or donee. However, the donor retains certain rights over the asset, such as the right to use it or live in it.
In practical terms, this means that the donor may continue to live in their own home even after transferring ownership to someone else. The recipient, in turn, is not allowed to use the home or benefit from it until after the donor's death.
The purpose of a gift with reservation of benefit is often to reduce the value of an estate for inheritance tax purposes, while still allowing the donor to retain the use and enjoyment of the asset. However, the rules governing such arrangements can be complex and require careful consideration.
There are several factors to consider when contemplating a gift with reservation of benefit. For example, the donor must relinquish control of the asset and the recipient must take on all the economic risks associated with it, such as maintenance costs and repairs. Additionally, such an arrangement can have an impact on any benefits the donor may be entitled to receive.
It is important to seek professional legal and financial advice before entering into a gift with reservation of benefit arrangement to ensure that all aspects are considered and that the transfer is done in a legally compliant manner.
Understanding The Gifting Rules
The UK inheritance tax rules are in place to ensure that those who inherit money or assets from a deceased person pay the appropriate amount of tax. In some cases, certain exemptions may apply and there is also an additional Inheritance Tax threshold for married couples and civil partners.
The rate of Inheritance Tax depends on how much is inherited, with different rates applying depending on the value of the estate. Additionally, gifts made within seven years before death can be subject to Inheritance Tax if they exceed a certain limit. It's important to understand these rules in order to ensure that you pay the right amount of tax when inheriting property or other assets.
It's important to speak to an expert who can provide you accurate and advice and tax planning and assist you with achieving a simple solution to a complicated subject matter.