What do I need to know about inheritance tax?
The topic of inheritance tax is so rife with controversies it must be on many people’s lists of banned dinner party conversations. Not least, it was a bargaining chip in the French Revolution. If you aren’t a French aristocrat but you are interested in what the tax can mean for you financially after your death, here’s a quick summary of how the tax works to see whether you’re eligible.
What is inheritance tax?
Inheritance tax is paid on your assets when you die. After it has deducted debts and outstanding payments, such as bills, the total value of your assets will indicate whether you come in under or exceed the inheritance tax threshold.
What are assets?
The government will review the total sum of your stuff – your money, property and any investments. This will include:
- Any cash in a bank account
- Any investments
- Any property you own
- Your business, if you have one
- Any vehicles
- Any payouts from life insurance
What is the inheritance tax threshold?
If the total worth of your assets after you die exceeds £325,000 (for one person) then you will be taxed at 40%.
There are some allowances to the tax surrounding property
The basic allowance
If you’re a couple who own a property, you can also leave a home worth up to £625,000 without getting taxed (worth up to £325,000 for a single person).
The ‘main residence’ allowance
Do you remember where you were when the 2015 Summer Budget was announced? Watching it on a big screen, popcorn in hand? Nevermind, here’s a recap of the new inheritance law proposals:
The big idea is that, by April 2020, the duty when parents or grandparents pass on a home worth up to £1 million after they die will be scrapped.
For the 2017/2018 tax year, the allowance will stand at £100,000 (taking the inheritance tax threshold £425,000). The allowance will then rise by £25,000 each year until 2020.
Will I pay inheritance tax?
If you expect to leave assets worth up to £425,000, or £625,000 per couple, then the 40% tax won’t be applied after you die. This is the inheritance tax threshold of £325,000 plus the new ‘main residence’ allowance of £100,000.
If you expect to leave above that, you can estimate how inheritance tax will impact what those you’ve named will get. If you think you’re assets are worth £500,000 then you won’t get taxed on the first £425,000 but you will be taxed 40% on the remaining £75,000. That’s a total of £30,000 in tax.
Do I pay inheritance tax if I’m married?
One of the great things about marriage is that on any assets you’ve left after you’ve died, your partner won’t be hit with inheritance tax. That’s romance.
What if I’m not married?
If you have a partner but aren’t married and own your property with them, after your death any assets that exceed £425,000 will be taxed.
The discussion around inheritance tax can get bogged down by government changes and political allegiances, but it’s an important part, for most people, in end of life planning. Knowing the basic elements to the tax underneath the jargon will allow you to give some thought to how the tax may end up affecting you.