We often consider inheritance tax one of life’s unavoidable topics. Accordingly, we need to understand how it works and learn some basic strategies to minimise its impact. In this episode of the “I Hate Numbers” podcast, we explain what IHT is, how it applies, and share simple tips on planning effectively to avoid paying it.
What is Inheritance Tax?
Inheritance tax in the UK is a tax on the estate of someone who has passed away. It includes the property, money, and possessions left behind. When the value of the estate exceeds the “nil rate band” threshold of £325,000 per individual, we must pay IHT. However, if the estate value stays below this amount, we avoid paying inheritance tax. Any amount above £325,000 is taxed at 40%.
Key Factors to Consider
Firstly, we need to recognise that every individual has an estate. This estate may include your home, savings, shares, and personal items, all of which contribute to the total value. When someone passes away, we calculate the estate’s value, and any amount over the nil rate band will be subject to IHT. However, we can take advantage of reliefs and exemptions to reduce the tax burden.
Reduce or Avoid Inheritance Tax with Planning
To reduce or avoid inheritance tax, we must plan ahead. One effective strategy is to make lifetime gifts. When we give gifts to beneficiaries and survive for at least seven years after, we ensure these gifts are exempt from inheritance tax. Moreover, leaving everything to your spouse or civil partner also helps avoid IHT and transfers your nil rate band. Additionally, we can make use of small annual gifts, like £3,000, which remain exempt from tax.
Conclusion
When we plan effectively, we can minimise or avoid inheritance tax altogether. We encourage you to act now to make informed decisions that will benefit your loved ones. Also, listen to the “I Hate Numbers” podcast for more insights on financial planning.