Many don’t realise that the current Inheritance tax (IHT) rules have a wide range of allowances which Britons can take advantage of to pass on their wealth when they die. Utilising these rules to the full extent could allow some people to pass on up to £1million entirely tax-free to their loved ones. The biggest tax-free tool for inheritance tax is the threshold or nil rate band.
This currently sits at £325,000 and applies to every single individual in the UK.
If an estate is worth less than this amount, then it faces no inheritance tax liability at all.
An estate, in regard to inheritance tax, is classed as anything from a person’s property, savings accounts, jewellery, or cars.
Married couples and those in Civil Partnerships can pass on their nil rate band amount to their spouse/partner if they pass away before the other.
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If someone hasn’t used any of their allowances, then the surviving partner could possibly double their allowance to £650,000.
The most important part of being able to pass on £1million, is the Residential Nil-Rate Band.
Like the nil-rate band, everyone qualifies for it and it currently sits at a rate of £175,000.
This sits on top of the £325,000 taking it up to £500,000 if a person is to give their property to direct descendants such as children and grandchildren.
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Couples, once again, can combine their allowances meaning they can give away £6,000 without paying tax.
People can also give as many gifts of up to £250 per person as they want each tax year, as long as they have not benefited from the £3,000 limit.
Birthday and Christmas gifts which are given from a person’s regular income are exempt from inheritance tax.
Parents can also gift £5,000 to their child if they are getting married, £2,500 to a grandchild or great-grandchild upon marriage, and £1,000 to another relative or friend.
People need to be aware of the seven-year rule in regard to gifts as if someone dies within seven years of giving their gift, then the recipient will have to pay inheritance tax either in full or at a reduced rate depending on when the person passes away.
One exception to this is gifts to spouses and civil partners during a person’s lifetime.
These, once again, will not incur any inheritance tax if they are legally married or in a civil partnership and both live in the UK permanently.
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