Inheritance Tax Accountant Advice

It is devastating to lose a loved one, and probably the last thing you will want to deal with is sorting out inheritance tax (IHT) issues. It is important that you look at this as soon as possible so that you know your rights and take care of your family’s needs moving forward. Although the family home is not subject to capital gains tax if sold, it may be subject to IHT.

The following page on the UK Government website gives you an overview.

What is Inheritance Tax?

Inheritance tax accountantThis is payable on the estate of a person when they die. An Estate is essentially the value of Assets less all liabilities of a deceased person. The estate of the deceased person will usually pay HMRC any amount due, however if the estate doesn’t pay it or cannot pay it then the person who inherits will have to pay.

This happens when the estate is comprised mainly of assets and has no cash. Usually the estate has six months to pay HMRC. There are situations where the timing of payments to HMRC are different.If you have assets which are worth above £325,000 then its best to plan ahead as there are many legal ways of avoiding this tax altogether.

How Inheritance Tax is Calculated

Very few of us actually know much about the ins and outs of it until we need to know – and then it can become a massive headache without the real facts.

In a nutshell, if you intend to leave your assets or money to people you know and love once you die, you could be leaving them a tax bill of up to 40% of your estate.

By law, your estate is defined as your property, savings, and any other assets of value, after any outstanding debts and funeral costs have been paid.

In reality, only a small number of estates are large enough to incur inheritance tax, but you should factor this into your plans when you make your will.

Only 4 to 5% of estates in the UK pay inheritance tax.

The Financial Facts

However, before you panic, it’s important to remember that there is usually no tax to be paid if:

  • the total value of your estate is below the Nil Rate Band (NRB) of £325,000
  • you leave everything above the threshold to your spouse or civil partner
  • you leave everything above the threshold to an exempt beneficiary such as a charity.

If your estate is above the Nil Rate Band of £350,000, then part of your estate above the threshold may be liable for the inheritance tax at the rate of 40%.

The Nil Rate Band (NRB) is fixed at £325,000 until 2021, but your NRB might be increased if you’re widowed or a surviving civil partner.  In fact, couples can transfer any unused NRB when the first person died to the survivor.

This new calculation can double the amount of NRB available up to £650,000, and this new rate is known as Transferable Nil Rate Band (TNRB).

How to Avoid Inheritance Tax on Property

If you’ve decided to leave your children or grandchildren your property, there are new property allowances that allow you to leave more of your home before any tax is due.

In the 2020-21 tax year, it’s worth £175,000 per person.

For a married couple, this increases the tax-free amount by £350,000, so including the personal allowance, estates of up to £1,000,000 could be completely free of IHT in 2020.

If all your wealth is tied up in your property, you may not be able to gift anyone money in your lifetime or even spend that money on yourself.

To avoid this happening to you, you could consider taking out an equity release scheme.

You must realise before you do this, is what you’re doing by taking out an equity release scheme, is reducing the assets you own and increasing the debts that will count against your property.

If this is the case, perhaps you should consider giving away assets early.

As a result of releasing equity, you are borrowing money against the real value of your home, which is known as a lifetime mortgage or selling part of your home at a reduced market rate but still being able to live there.

It’s essential to remember you are ‘rolling up’ interest with a lifetime mortgage, and your debt can quickly grow.

Whatever you decide, it’s essential to remember that seeking advice from a specialist is highly recommended, as inheritance tax can be a complicated business!

How can we help you?

At the Finance Equation we are passionate about helping our clients keep more of their money. If you are worried about your overall tax position our experts can definitely help you navigate the IHT maze.

If you have a property business and want to know how to avoid inheritance tax on property, we can help you to totally avoid IHT by using a specific company structure. If you qualify to use this structure then clearly you would save a substantial amount of IHT. This complies with tax case law and statute.