This week, I would like to tell you a bit more about inheritance tax. In previous weeks, we talked about how you can make the most of tax breaks on a general level. This week, join me in understanding how inheritance tax (IHT) works.
It is not easy for us to talk about morbidity and death, but the best way to leave your family members free of debt and finance-related stress is to plan for it. Inheritance planning is essential for the financial and general well-being of those you leave behind. My guest expert this week was Aidan Dow and owner of Aidan Dow Wealth Management. Aidan introduced the three basics of inheritance tax. They are:
- Wills and Inheritance Distribution
Over 60% of the UK population does not have a will. This figure is concerning considering that wills form the basis of inheritance planning. It ensures only those you want to inherit your property do so. It also allows you to redirect your property to take advantage of tax breaks.
- Nil Rate Band
Nil rate bands refer to the value of a property that is tax-free. For inheritance, this band stands at £325,000. If your estate is valued at below this figure, you do not have to pay inheritance tax. Every pound above this amount is taxed at 40%.
- Gifting Assets
You can avoid IHT by understanding how potentially exempt transfers work. These transfers apply to assets you gift to others, but under the seven-year rule. Under this rule, such assets will not be counted as part of your estate only if you are alive seven years after gifting them. They then fall under the property of the people you passed them to.
However, gifting assets such as cash as wedding presents or charity donations automatically mitigates or eliminates the IHT on your estate.
- Married couples
Transferring assets between married couples triggers no taxable gain. In some cases, individuals may want to leave the assets to the surviving spouse. It triggers no IHT at the first death, but it may trigger higher IHT at the second death as the nil rate band for the first death was wasted. Therefore, it worth noting that you may wish to consider ways to fully utilize the nil rate band to save £130,000 worth inheritance tax.
Of course, IHT has many other facets; these are just the basics. Follow our future blogs to get the latest on the more technical side of IHT in the coming weeks.
P.S. If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please book me in via the link so we can arrange a chat: https://hannah-xu.youcanbook.me