We all want
to leave something behind for our loved ones. It’s what we get up in the
morning and work hard for. But a financial gift unfortunately has a tax implication
to it. Research shows that only 45% of people making financial gifts are aware
of Inheritance Tax.
It is always
recommended to write a will, you can get a professional to do this for you for
as little as £150. Make sure your money goes to who you want it to.
We are
hearing a lot of cases where there is no will. It can cause issues in a couple of situations example if your partner
needs to go into a nursing home. What
happens to children under the age of 18. Your wife, husband or civil partner
having difficulty accessing family funds.
The treasury
benefits from £5.8 billion income in inheritance tax each year. There are also
10,000 unclaimed estates where a no next of kin has been found worth more than
£150,000, plus thousands more amounting to several million pounds. After 30 years that money is gone if a direct
descendant cannot be found, it goes straight to the treasury and not to your
family.
Live in
partners are not next of kin, even if they have been living with you for 20
years or more. Under inheritance tax
law they have no rights to anything if a will has not been created.
So, what
is Inheritance Tax?
Inheritance
Tax is a tax on an estate of someone who’s died. An estate is the likes of
property, money and possessions. There is a tax-free threshold of £325,000. You
normally don’t have to pay inheritance tax if the value of your estate falls
below the £325,000 threshold.
If you pass
all your assets to your wife/husband, civil partner there is no inheritance tax
to pay, its only when you give assets away to other people that inheritance tax
is payable. Its 40% tax over and above the nil rate band.
There is an
elected transfer to your spouse, civil partner or charity where both your nil
rate band and your partners can be added together to make a maximum tax-free
amount of £650,000. The transfer is claimed on the occasion of the 2nd
partner dying. It’s not automatic there is a form to complete for this. Don’t
assume its Automatic.
Your
threshold can also increase if your estate is worth more than £325,000 and you give
your home away to your children (this includes adopted, foster or stepchildren)
or grandchildren. There is up to an extra £150,000 available to be added to
your threshold. If the estate is below £325,000,
you will still have to report this to HMRC. Probate forms usually must be
completed within a certain timeframe of someone dying.
Example
Say your estate is worth £550,000, your
tax-free threshold is £325,000. You will get an increase of up to £150,000 if your
home is given to direct descendants. The inheritance tax charged will be 40% of
£75,000.
Who pays
the tax bill?
Funds from
your estate are used to pay the Inheritance Tax to HMRC. If there is a will this is done by the person
dealing with the estate known as the executor. The beneficiaries are the people
who inherit your estate do not normally pay the tax on the things they inherit.
7 Year
Rule
There is
normally no inheritance tax to pay if you gift your home and live for another 7
years, although capital gains tax might come into play. If you die within 7 years of giving all or
part of your property, your home will be treated as a gift and the 7-year rule
applies. There are many tax reliefs that can be gained between the 0 years and 7-year
rule. Always use an accountant if your estate has multiple sources of income. Don’t
miss out on the hidden tax reliefs.
Gifts
You do not
have to pay any tax on gifts between spouses, you can give them as much as you
like during your lifetime.
Anyone is
entitled to give gifts of up to £3,000 per annum without any inheritance tax
being involved. You can carry over an unused annual exemption to the next
financial year, this can only be the next financial year that immediately
follows. It’s important to record this in a diary as proof to avoid it being
used to reduce your nil rate band.
You can also
give away the following, in each tax year:
·
Wedding gifts of up to £1,000 to any person
(£2,500 to a grandchild, and £5,000 to a child)
·
Normal gifts out of your income, such as
Christmas or birthday presents
·
Payments to help another person’s living cost
such as an elderly relative
·
Gifts to charities and political parties
You can also
give as many gifts of up to £250 per person as you want during the tax year if
you have not used another exemption on the same person.
Inheritance
tax is a complicated tax system that encounters many of the other tax systems
within it, always seek professional advice if this is not a straightforward
estate.
