How to check whether you’ve fallen into the Inheritance Tax trap

With the effects of inflation and investment growth, as many as 800,000 homes in Britain are now worth at least a million pounds. This means more people are likely to fall into the Inheritance Tax (IHT) net and they may not even know it.

The problem is you have falling into the inheritance tax trap and it will be those you leave behind who have to pick up the pieces

When drawing up your will, it’s vital you factor in the value of your estate. The good news is, if you understand the value of your assets before you die, you may be able to reduce or even eliminate the Inheritance Tax payable.

But, first you need to know whether you fall into the inheritance tax trap.

Here’s how to check if your estate belongs to the taxman and what you can do about it:

What exactly is Inheritance Tax?

Inheritance Tax (IHT) is the tax applied on the estate of someone who has died, including all property, possessions, and money.

Usually, it’s not until someone writes up their will, they realise the true value of their assets. This is why having a valid will in place is the most practical way of securing your family’s financial future if something were to happen to you.

Some of these assets could include:

  • Investments;

  • Furniture;

  • Shares;

  • Pensions;

  • Personal items;

  • Cash in the back;

  • Property;

  • Businesses you own; and

  • Vehicles.

If the value of your assets reach above £325,000, your estate is then liable to owe Inheritance Tax if you were to pass away.

This is why a will is so important. A will not only helps you to protect the future of your loved ones and your business, but it’s a way to plan and ensure they don’t get hit with a hefty Inheritance Tax bill.

How much is IHT?

Inheritance Tax works like this:

If your estate is valued above the nil rate band (NRB) of £325,000, the portion above this threshold is taxed at the rate of 40%.

So, if your estate is worth £645,000 and your IHT threshold is £325,000, you will be charged tax on the excess £320,000. You’re looking close to being charged £80,000 in tax. We’re sure you agree, £80,000 is a substantial amount of money to give over to the taxman.

This is a common issue we see over and over again when it comes to inheritance tax. On the whole, people are unsure of the exact terms involved in inheritance tax, so when they die, they have unknowingly left their family to deal with a high tax bill.

Are there exemptions from IHT?

Like most aspects of life, thankfully, there are exceptions to the rule. There are specific assets exempt from Inheritance Tax. These exemptions are also known as tax reliefs.

Here are a few of the cases where there is no tax to be paid:

  • If your estate is below the IHT threshold of £325,000; or

  • If you leave your estate to your spouse or civil partner; or

  • If you leave your estate to an exempt beneficiary i.e., a charity; or

  • If you’re passing on agricultural, heritage or woodland property.

Be aware there are certain gifts you can give away without incurring Inheritance Tax. Usually gifts worth more than £3000 are subject to tax. Where many people go wrong is assuming that the majority of gifts are covered under your ‘annual exemption’.

Inheritance Tax planning is a complex matter. However, with effective estate planning, you can minimise taxes, and outline the areas where you can save – especially when it comes to legal fees and court costs.

The first step to understanding and protecting your future is listing your assets.

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