Your estate will owe tax at 40% on anything above the £325,000 inheritance tax threshold when you die (or 36% if you leave at least 10% to a charity) unless you are exempt (see below).
Who pays inheritance tax?
In the 2014/15 tax year, everyone is allowed to leave an estate valued at up to a £325,000 without their beneficiaries paying tax on it. The amount is set by the Government and is called the nil-rate band, because it’s the amount you pay a ‘nil-rate’ of IHT on. Above that amount, anything you leave behind is subject tax of 40% (or 36% if you leave at least 10% of your assets to a charity).
So for example, if you leave behind assets worth £500,000, your estate pays nothing on the first £325,000, and 40% on the remaining £175,000 – a total of £70,000 in tax – if you’re not leaving anything to charity. Officially, the £325,000 limit has been frozen until at least 2017/18, when the Government will look at whether to increase it. In March 2014, the Prime Minister announced proposals to increase the threshold to £500,000 – though , nothing concrete has yet been done to make this happen.
Am I exempt if I’m married?
When you die, any assets left to your spouse or registered civil partner, provided they’re UK-domiciled, are exempt from inheritance tax. On top of this, your partner’s inheritance tax allowance rises by the amount you didn’t leave to others, meaning together a couple can currently leave £650,000 tax-free.
Mr and Mrs Bloggs have assets worth £800,000 between them. Let’s say Mr B dies first, and leaves £200,000 to their children. The remaining £125,000 of his nil-rate allowance will pass on to Mrs B, giving his wife an allowance of £450,000. When she passes away, with assets of £600,000, as Mr Bloggs didn’t use his full nil-rate allowance she’ll owe 40% on everything above £450,000, meaning £60,000 (40% of £150,000) will be payable in tax, leaving all the rest (£540,000) to the children.
What if I’m not married?
While transfers of property and other assets between married couples or civil partners don’t attract inheritance tax, this isn’t the case for unmarried couples.
If you’re not married, but own assets jointly with another person, the situation gets complicated, especially where a residential property is involved. Your liability to pay IHT will depend on whether you and your partner own the property as ‘joint tenants’ or ‘tenants in common’ and whether there’s a will.
If you’re joint tenants (you both own all the property), and your partner’s left you everything in the will, then if your partner’s assets, including the property, exceed the £325,000 inheritance tax threshold, you’d have to pay it on any assets in the estate above that. After your partner’s death, your property would then be owned by you in its entirety.
However, if your partner didn’t leave a will, his or her family may have a claim to your partner’s share, There are different ways of reducing your inheritance tax liability.
Contact us for more details.