In February it was revealed HMRC took a record £6.4m in inheritance tax for the year 2022/23.
That amount is expected to grow over the coming years. So too is the number of people due to pay inheritance tax. In the year 2020/21 around 4.1 per cent of the population paid inheritance tax, for instance. By 2027-28, that number will have jumped to 6.7 per cent. Analysts say this is mainly due to the increased cost of housing pushing many homes over the £325,000 threshold for families.
Also known as the nil rate band, that £325,000 cut-off point means any assets a family inherits over this amount – whether in property, gifts, heirlooms or money etc – is subject to 40 per cent tax. Only charities and spouses or civil partners are exempt from paying this.
Passing on a home
There is a bit of lee-way for your children or grandchildren (including foster, adopted and step-kids) when you pass on your property – the tax threshold jumps to £550,000.
But it’s important that, if you give your property as a ‘gift’ to your children years before you die, that you don’t continue to live in it. Only this week it was revealed that 2,100 families have paid back £700m in inheritance tax over the past five years for this very reason. HMRC ruled that doing so breached regulations.
If you’re in a partnership (married or civil) then you can benefit from your spouse’s unused nil rate band. In this way you have double the amount of threshold with £650,000.
What makes up an inheritance?
Any assets are added to the value of a property to count towards your estate. This could be a car, jewellery, land, money, shares etc. it also includes your share of any joint assets, such as a holiday home or caravan etc. Any debts or liabilities can be deducted, such as a mortgage, credit card debt, household bills and even funeral expenses (although probate and solicitor charges can’t be). The final sum is the inheritance amount on which tax is calculated.
Inheritance Tax gifts
You can give away a painting, jewellery, money and other assets as gifts worth more than £3,000 and no tax will be due provided, that is, that you don’t die within seven years. This is referred to as the seven-year rule and if death does occur within this time then the tax due reduces on a sliding scale. For instance, tax is still 40 per cent within the first three years but drops to eight per cent if death is within six years.
Paying inheritance tax
The executor of the will is responsible for ensuring any inheritance tax is paid. In the absence of a will it’s the estate administrator. In most cases the money is paid through the Direct Payment Scheme (DPS), from the deceased’s bank or building society account.
Inheritance tax must be paid within six months of the death, but a reference number must be applied for at least three weeks before the first payment is made. Otherwise, interest on the amount due will be charged by HMRC.
Reducing your inheritance tax bill
There are a number of ways you can cut back the amount of money that has to be paid in inheritance tax. For instance, leaving money to charity will reduce your assets. So too will putting assets into a trust for your family or friends. You can also ‘gift’ up to £3,000 a year.
Paying inheritance tax with life insurance
It’s possible to use the money from a life insurance policy to pay off any inheritance tax. For this you have to take out the policy ‘in trust.’ That way the money is paid to your beneficiaries and not your ‘estate’ ie it won’t count towards your assets for tax purposes and your family can use it to pay off what’s due to HMRC.
If you’d like help with writing your will, or could do with some general advice about inheritance tax, then do get in touch with the team here at Grey Matters. You can call us on 01628 947066 or, if you prefer, email via info@grey-matters-consultancy.com
