What is inheritance tax?
It’s exactly what it says – a tax on the estate (including property, possessions and any money) of a deceased person. Thresholds are the limits where any beneficiaries of an estate start to pay inheritance tax, and it depends on whether the person is single or married.
The current threshold for inheritance tax is £325,000 per person. So if a single person dies their beneficiaries will only start to pay inheritance tax on the estate if it is valued over that amount. If you leave your property to your children (and that includes step-children, adopted or foster children too) and grandchildren, then the individual threshold goes up to £450,000.
Married couples can leave their beneficiaries up to £650,000 tax free, but only as long as the first person to die leaves everything to their partner. Anything over this limit is subject to a 40% tax bill. Any ‘unused’ threshold limits can be added to your partner’s threshold.
Property prices on the rise
Those numbers may seem like a lot, and therefore the majority of people shouldn’t have too much to worry about when it comes to inheritance tax. However, when you consider that the gov.uk government website put the average price of a house in the UK at around £234,794 in January 2017, you can see that many people who do own their own home could be closer than they thought to the limit, especially if they’re in an unmarried partnership and are therefore only entitled to the lower limit. When you add in the rest of the estate (and remember that everything is taken into consideration when calculating the value of an estate for probate) then a few ISAs, the family car, some jewellery, and the cash in the bank could easily make up the remainder of your allowance.
Don’t worry too much if you just tip over into the bracket for paying inheritance tax, though, as you’ll only pay tax on the amount above the allowance, not the whole sum.
Giving to charity
The amount of inheritance tax your beneficiaries pay can be reduced to 36% on some assets if you bequeath at least 10% of the net value of your estate to charity.
There are other ways to reduce the amount of tax paid through ‘taper relief’ for property given as a gift while a person is still alive. Your beneficiaries can also reduce the tax bill with Business relief, which lets some assets be passed on without inheritance tax being charged.
What about the future?
The state of the property market is in flux, and for the first time in years, average prices actually went down at the start of 2018. However, high-end properties (particularly desirable residences in the south of England, London, and other key locations such as Cumbria, Manchester, the West Country, and the Midlands) could still see a more buoyant market rate in the next 12 months. It’s very difficult to predict exactly how high property prices will go, and whether or not the cut-off point for inheritance tax will keep pace with the changing market.
If you’re currently sorting out your will and want to make sure your family isn’t hit hard with an inheritance tax bill after your death then it is well worth seeking the advice of a property and probate law expert. They will be able to look at your assets and tell you how to make sure your beneficiaries are not left out of pocket.
Web site content note: This is not legal advice; it is intended to provide information of general interest about current legal issues.