Best Way To Avoid Inheritance Tax On Property
Some estates are subject to inheritance tax (IHT) when they are passed on. This means that the total value of a person’s assets, including property, is larger than the tax free threshold when they passed away. Because property values have increased significantly in many regions in the past thirty years or so, more estates than ever are being caught by the tax. But there are ways to reduce its impact.
If you need to sell an inherited home quickly, we’re experienced at dealing sensitively with emotionally-charged situations like this.
When is inheritance tax due?
Everybody can pass on £325,000 tax free plus a further £175,000 if your assets include a home you are leaving to children or grandchildren. When a spouse dies their tax free threshold is added to that of their surviving spouse or civil partner. This means it’s possible to pass on £1 million without paying inheritance tax.
Any assets above these thresholds are taxed at 40%. For estates worth more than £2million the additional tax free threshold for homes, known as the residential nil rate band (RNRB), reduces by £1 for every £2 it is over £2 million. So an estate worth £2.7million or more would lose the full £350,000 RNRB a widowed spouse or civil partner is entitled to.
These thresholds are subject to change depending on the policies of the government of the time.
Reducing what is owed
There are ways to legally limit how much inheritance tax you pay. The first and simplest is to leave everything to a surviving spouse or civil partner, since this will not be taxed. It is important to make a will stating this. If there is no will, known as intestacy, some of the estate will be passed on to children and may be subject to inheritance tax.
Wills can also be changed after someone has passed away as long as all beneficiaries agree. For example, children may decide it is more tax efficient for all assets to pass to their surviving parent.
If you do not have a spouse or civil partner there are other ways to reduce IHT:
- Gifts – money or assets that have been gifted seven years before someone dies are not subject to the tax. Those given within three years will be taxed at 40% if they are part of an estate worth more than the inheritance tax threshold. This reduces by 8% each year after that. You can also give gifts of up to £3,000 tax free per year and contributions to weddings or civil ceremonies of children are exempt up to £5,000.
Trusts – as long as you, your spouse or children under the age of 18 do not benefit from them, trusts are not counted as part of your estate when you die. When you set up a trust it means you give cash or another asset to someone to use for the benefit of a third person. So you could set one up for your adult child to help them pay for the cost of caring for someone. It’s important to be aware some trusts attract income and capital gains tax.
- Charity – everything you leave to charity is tax free. If you leave 10% of your estate to charity it will reduce your IHT rate from 40% to 36%.
Insurance – taking out life insurance won’t reduce your IHT bill but it will give those inheriting your assets a sum of money to help them cover the costs. The policy should be placed in trust to ensure it is not added to the value of the estate.
- Equity release – this is a way of taking value from a home and passing it on as a gift during your lifetime, bearing in mind it will avoid IHT if given seven years before your death. This will add debt to your estate that will need to be paid, usually when you die, so it’s important to work out if the tax savings are worth it.
As you plan your inheritance it’s a good idea to talk to an expert before making any big decisions, such as equity release, to make sure it’s the right option for you.
Paying the bill
Once the value of an inherited estate has been calculated the beneficiaries will have to pay any inheritance tax that is due. If there’s enough money in a bank account or investment that’s been inherited, the bank can usually arrange a direct payment to HMRC.
If there isn’t, beneficiaries will either have to pay using their own funds or arrange a loan – sometimes known as a probate or executor loan – to cover the cost, before getting the money back once the estate is inherited. However, inheritance tax on assets such as a home can be paid off in ten annual instalments.
Working with us
If you inherit a home it can’t be sold until probate has finished and ownership has been transferred to you.
Once it is legally yours, you may want to sell it quickly to cover a probate loan or recoup other costs. We can buy your home within seven days if necessary, bringing you peace of mind at a difficult time and getting funds into your account quickly.
If you’d like to find out more about the service we offer, please get in touch for a chat.